<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 6, 1998
REGISTRATION NO. 333-49013
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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ALLEGIANCE TELECOM, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 4832 75-2721491
(State or other jurisdiction (Primary Standard (IRS Employer
of incorporation or organization) Industrial Classification Code Identification Number)
Number)
</TABLE>
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1950 STEMMONS FREEWAY
SUITE 3026
DALLAS, TEXAS 75207
TELEPHONE: (214) 853-7100
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
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ROYCE J. HOLLAND, CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Allegiance Telecom, Inc.
1950 Stemmons Freeway
Suite 3026
Dallas, Texas 75207
Telephone: (214) 853-7100
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copy to:
MARK B. TRESNOWSKI
Kirkland & Ellis
200 East Randolph Drive
Chicago, Illinois 60601
(312) 861-2000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH
STATE.
SUBJECT TO COMPLETION, DATED MAY 6, 1998
PROSPECTUS
, 1998
ALLEGIANCE TELECOM, INC.
OFFER TO EXCHANGE ITS SERIES B 11 3/4% SENIOR DISCOUNT NOTES DUE 2008 FOR ANY
AND ALL OF ITS OUTSTANDING 11 3/4% SENIOR DISCOUNT NOTES DUE 2008
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
, 1998, UNLESS EXTENDED.
Allegiance Telecom, Inc., a Delaware corporation (the "Company"), hereby
offers (the "Exchange Offer"), upon the terms and conditions set forth in this
Prospectus (the "Prospectus") and the accompanying Letter of Transmittal (the
"Letter of Transmittal"), to exchange $1,000 principal amount of its Series B
11 3/4% Senior Discount Notes due 2008 (the "New Notes"), registered under the
Securities Act of 1933, as amended (the "Securities Act"), pursuant to a
Registration Statement of which this Prospectus is a part, for each $1,000
principal amount of its outstanding 11 3/4% Senior Discount Notes due 2008 (the
"Old Notes"), of which $445,000,000 principal amount at maturity is outstanding.
The form and terms of the New Notes are the same as the form and term of the Old
Notes (which they replace), except that the New Notes will bear a Series B
designation and will have been registered under the Securities Act and,
therefore, will not bear legends restricting their transfer and will not contain
certain provisions relating to liquidated damages which were included in the
terms of the Old Notes in certain circumstances relating to the timing of the
Exchange Offer. The New Notes will evidence the same debt as the Old Notes
(which they replace) and will be issued under and be entitled to the benefits of
an Indenture, dated as of February 3, 1998 (the "Indenture"), between the
Company and The Bank of New York, as trustee (the "Trustee"), governing the Old
Notes and the New Notes. The Old Notes and the New Notes are sometimes referred
to herein collectively as the "Notes." See "The Exchange Offer" and "Description
of the Notes."
Interest on the Notes will not be payable prior to August 15, 2003. From
and after February 15, 2003, interest on the Notes will accrue on the principal
amount at maturity at a rate of 11 3/4% per annum, payable semi-annually on
February 15 and August 15 of each year, commencing on August 15, 2003. The Notes
will mature on February 15, 2008 and will not be subject to any sinking fund
requirement. The Notes will be redeemable by the Company, in whole or in part,
at any time on or after February 15, 2003, at the redemption prices set forth
herein, plus accrued and unpaid interest, if any, to the redemption date. Prior
to February 15, 2001, the Company, at its option, may redeem in the aggregate up
to 35% of the original principal amount at maturity of the Notes at 111.75% of
their Accreted Value (as defined herein) on the redemption date with the net
proceeds of one or more Public Equity Offerings (as defined herein), provided
that at least $289.3 million of the aggregate principal amount at maturity of
the Notes originally issued remains outstanding immediately after the occurrence
of any such redemption. Although the Company would have such redemption right in
connection with its currently contemplated Equity Offering (as defined herein),
the Company currently intends to use the proceeds from such Equity Offering to
fund its business plan, and not to redeem a portion of the Notes. See
"Prospectus Summary -- Financing Plan" and "Description of the Notes -- Optional
Redemption."
The New Notes will be, as the Old Notes (which they replace) are, senior
unsecured obligations of the Company, and will, as the Old Notes (which they
replace), rank pari passu in right of payment to all existing and future senior
unsecured indebtedness of the Company and senior in right of payment to any
subordinated indebtedness of the Company. The Notes will be effectively
subordinated to all existing and future indebtedness of the Company to the
extent of the value of the assets securing such indebtedness and will be
structurally subordinated to all existing and future indebtedness of its
subsidiaries. As of March 31, 1998, the Company had no indebtedness other than
the Notes.
(Cover continued on following page)
SEE "RISK FACTORS," BEGINNING ON PAGE 11, FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY HOLDERS WHO TENDER THEIR OLD NOTES IN THE EXCHANGE
OFFER.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 3
(Cover page continued)
In the event of a Change of Control (as defined herein), each holder of the
Notes will have the right to require the Company to purchase its Notes at a
purchase price equal to 101% of the Accreted Value thereof on the relevant
Payment Date (as defined herein) plus accrued interest, if any, to the Payment
Date. See "Description of the Notes -- Covenants," "-- Certain Definitions" and
"-- Repurchase of Notes Upon a Change of Control." In addition, the Company is
obligated in certain instances to make offers to repurchase the Notes at a
purchase price in cash equal to 100% of the Accreted Value thereof plus accrued
interest, if any, to the relevant Payment Date with the proceeds of certain
asset sales. See "Description of the Notes -- Certain Covenants."
The Company will accept for exchange any and all Old Notes validly tendered
and not withdrawn prior to 5:00 p.m., New York City time on 1998,
unless extended by the Company in its sole discretion (the "Expiration Date").
Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m. on the
Expiration Date. The Exchange Offer is subject to certain customary conditions.
The Old Notes were sold by the Company on February 3, 1998 to the Initial
Purchasers (as defined herein) in a transaction not registered under the
Securities Act in reliance upon an exemption under the Securities Act (the
"Initial Offering"). The Initial Purchasers subsequently placed the Old Notes
with qualified institutional buyers in reliance upon Rule 144A under the
Securities Act and qualified buyers outside the United States in reliance upon
Regulation S under the Securities Act. Accordingly, the Old Notes may not be
reoffered, resold or otherwise transferred in the United States unless
registered under the Securities Act or unless an applicable exemption from the
registration requirements of the Securities Act is available. The New Notes are
being offered hereunder in order to satisfy the obligations of the Company under
the Notes Registration Rights Agreement (as defined herein) entered into by the
Company and the Initial Purchasers in connection with the Initial Offering. See
"The Exchange Offer."
Based on no-action letters issued by the staff of the Securities and
Exchange Commission (the "Commission") to third parties, the Company believes
the New Notes issued pursuant to the Exchange Offer may be offered for resale,
resold and otherwise transferred by any holder thereof (other than any such
holder that is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such holder's business and such
holder has no arrangement or understanding with any person to participate in the
distribution of such New Notes. See "The Exchange Offer -- Resale of the New
Notes." Each broker-dealer (a "Participating Broker-Dealer") that receives New
Notes for its own account pursuant to the Exchange Offer must acknowledge that
it will deliver a prospectus in connection with any resale of such New Notes.
The Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a Participating Broker-Dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
Participating Broker-Dealer in connection with resales of New Notes received in
exchange for Old Notes where such Old Notes were acquired by such Participating
Broker-Dealer as a result of market making activities or other trading
activities. The Company has agreed that, for a period of 180 days after the
Expiration Date, it will make this Prospectus available to any Participating
Broker-Dealer for use in connection with any such resale. See "Plan of
Distribution."
Holders of Old Notes not tendered and accepted in the Exchange Offer will
continue to hold such Old Notes and will be entitled to all the rights and
benefits and will be subject to the limitations applicable thereto under the
Indenture and with respect to transfer under the Securities Act. The Company
will pay all the expenses incurred by it incident to the Exchange Offer. See
"The Exchange Offer."
There has not previously been any public market for the Old Notes or the
New Notes. The Company does not intend to list the New Notes on any securities
exchange or to seek approval for quotation through any automated quotation
system. The Old Notes are currently eligible for trading in the Private
Offerings, Resales and Trading through Automated Linkages ("PORTAL") market.
However, there can be no assurance that an active market for the New Notes will
develop. See "Risk Factors -- Absence of a Public Market Could Adversely Affect
the Value of Notes." Moreover, to the extent that Old Notes are tendered and
accepted in the Exchange Offer, the trading market for untendered and tendered
but unaccepted Old Notes could be adversely affected.
The New Notes will be available initially only in book-entry form and the
Company expects that the New Notes issued pursuant to the Exchange Offer will be
represented by one or more Global Notes (as defined herein), which will be
deposited with the Trustee as custodian for, and registered in the name of a
nominee of, The Depository Trust Company ("DTC"). Ownership of beneficial
interests in the Global Notes will be shown on, and the transfer of that
ownership will be effected only through, records maintained by DTC and its
participants. After the initial issuance of the Global Notes, New Notes in
certificated form will be issued in exchange for Global Notes only under certain
limited circumstances as set forth in the Indenture. See "Description of the
Notes -- Book Entry; Delivery and Form."
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AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 (the "Exchange Offer Registration Statement," which term shall encompass all
amendments, exhibits, annexes and schedules thereto) pursuant to the Securities
Act, and the rules and regulations promulgated thereunder, covering the New
Notes being offered hereby. This Prospectus does not contain all the information
set forth in the Exchange Offer Registration Statement. For further information
with respect to the Company and the Exchange Offer, reference is made to the
Exchange Offer Registration Statement. Statements made in this Prospectus as to
the contents of any contract, agreement or other document referred to are not
necessarily complete. With respect to each such contract, agreement or other
document filed as an exhibit to the Exchange Offer Registration Statement,
reference is made to the exhibit for a more complete description of the document
or matter involved, and each such statement shall be deemed qualified in its
entirety by such reference. The Exchange Offer Registration Statement, including
the exhibits thereto, can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at the Regional Offices of the Commission at 7 World
Trade Center, 13th Floor, New York, New York 10048 and at Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
materials can be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
Commission maintains a Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. The address of such site is http://www.sec.gov.
As a result of the filing of the Exchange Offer Registration Statement with
the Commission, the Company will become subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith will be required to file periodic reports and
other information with the Commission. The obligation of the Company to file
periodic reports and other information with the Commission will be suspended if
the New Notes are held of record by fewer than 300 holders as of the beginning
of any fiscal year of the Company other than the fiscal year in which the
Exchange Offer Registration Statement is declared effective. The Company has
agreed pursuant to the Indenture that, whether or not it is required to do so by
the rules and regulations of the Commission, for so long as any of the Notes
remain outstanding, it will furnish to the holders of the Notes (within 15 days
after it is or would have been required to file with the Commission) and file
with the Commission (unless the Commission will not accept such a filing) (i)
all quarterly and annual financial information that would be required to be
contained in a filing with the Commission on Forms 10-Q and 10-K if the Company
was required to file such forms, including a "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and, with respect to
the annual information only, a report thereon by the Company's certified
independent accountants and (ii) all current reports that would be required to
be filed with the Commission on Form 8-K if the Company was required to file
such reports.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. Unless the
context otherwise requires, references herein to "Allegiance" and the "Company"
refer to Allegiance Telecom, Inc., a Delaware corporation, and its subsidiaries.
Certain information contained in this summary and elsewhere in this Prospectus,
including information under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and information with respect to the
Company's plans and strategy for its business and related financing, includes
forward-looking statements that involve risk and uncertainties. Prospective
investors should carefully consider the factors set forth under "Risk Factors"
and are urged to read this Prospectus in its entirety.
THE COMPANY
Allegiance Telecom, Inc. seeks to be a premier provider of
telecommunications services to business, government and other institutional
users in major metropolitan areas across the United States. As a competitive
local exchange carrier ("CLEC"), Allegiance anticipates offering an integrated
set of telecommunications products and services including local exchange, local
access, domestic and international long distance, enhanced voice, data and a
full suite of Internet services. The Company was founded in April 1997 by a
management team led by Royce J. Holland, the former president, chief operating
officer and co-founder of MFS Communications Company, Inc. ("MFS"), and Thomas
M. Lord, former managing director of Bear, Stearns & Co. Inc., where he
specialized in the telecommunications, information services and technology
industries. The Company's initial equity financing of approximately $50.1
million has been provided by this management team and Madison Dearborn Capital
Partners, Morgan Stanley Capital Partners, Frontenac Company and Battery
Ventures.
The Company believes that the Telecommunications Act of 1996 (the
"Telecommunications Act"), by opening the local exchange market to competition,
has created an attractive opportunity for new facilities-based CLECs like the
Company. Most importantly, the Telecommunications Act established a framework
for CLECs to acquire the unbundled network elements ("UNEs") from the incumbent
local exchange carriers ("ILECs") that are necessary for the cost-effective
provision of service. As such, the Telecommunications Act will enable the
Company to deploy digital switching platforms with local and long distance
capability and initially lease fiber trunking capacity from the ILECs and other
CLECs to connect the Company's switch with its transmission equipment collocated
in ILEC central offices. Thereafter, the Company plans to lease capacity or
overbuild specific network segments as economically justified by traffic volume
growth. Management believes that pursuing this "smart build" approach should:
(i) accelerate market entry by 9 to 18 months by deferring the need for city
franchises, rights-of-way and building access; (ii) reduce initial capital
requirements for individual market entry prior to revenue generation, allowing
the Company to focus its capital resources on the critical areas of sales,
marketing, and operations support systems ("OSS"); (iii) provide for ongoing
capital expenditures on a "success basis" as demand dictates; and (iv) allow the
Company to address attractive service areas selectively throughout its targeted
markets.
Allegiance is currently developing tailored systems and procedures for OSS
and other back office systems that it believes will provide the Company with a
significant competitive advantage in terms of cost, processing large order
volumes and customer service. These systems are required to enter, schedule,
provision and track a customer's order from the point of sale to the
installation and testing of service and also include or interface with trouble
management, inventory, billing, collection and customer service systems. The
legacy systems currently employed by most ILECs, CLECs and long distance
carriers, which were developed prior to the passage of the Telecommunications
Act, generally require multiple entries of customer information to accomplish
order management, provisioning, switch administration and billing. This process
is not only labor intensive, but it also creates numerous opportunities for
errors in provisioning service and billing, delays in installing orders, service
interruptions, poor customer service, increased customer churn and significant
added expenses due to duplicated efforts and the need to correct service and
billing problems. The Company believes
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that the practical problems and costs of upgrading legacy systems are often
prohibitive for companies whose existing systems support a large number of
customers with ongoing service.
Allegiance plans to deploy networks in 24 Tier I markets. The Company
estimates that these 24 markets will include 18 basic trading areas ("BTAs")
with more than 20 million non-residential access lines, representing
approximately 44.7% of the total non-residential access lines in the U.S. With a
network deployment and end user, direct sales marketing strategy focusing on the
central business districts and suburban commercial districts in these areas,
Allegiance plans to address a majority of the non-residential access lines in
most of its targeted markets. The Company plans to deploy its networks
principally in two phases of development. The first, or Phase I, is to offer
services in 12 of the largest metropolitan areas in the U.S., which the Company
believes include approximately 26.0% of the nation's total non-residential
access lines. Allegiance is currently operational in three Phase I markets: New
York City, Dallas and Atlanta; and is in the process of deploying networks in
five additional Phase I markets: Chicago, Los Angeles, San Francisco, Boston and
Fort Worth. In each of these markets, the Company will use a Lucent Technologies
Inc. ("Lucent") Series 5ESS(R)-2000 digital switch, which provides local and
long distance functionality. Pending securing additional financing, the Company
intends to begin its network development in its Phase II markets. These
additional 12 markets are estimated to encompass approximately 18.7% of the
total non-residential access lines in the U.S. Management expects to commence
network deployment in these cities in 1999, with service anticipated to begin
during 1999 and 2000.
As of April 30, 1998, the Company has made sales of 8,434 lines to 534
customers, of which, 5,757 lines for 329 customers were in service as of such
date.
The Company is a Delaware corporation with its principal executive offices
located at 1950 Stemmons Freeway, Suite 3026, Dallas, Texas 75207, and its
telephone number is (214) 853-7100.
BUSINESS STRATEGY
To accomplish its goal of becoming a premier provider of telecommunications
services to business, government, and other institutional users in U.S.
metropolitan areas, the Company has developed an end-user-focused business
strategy designed to achieve significant market penetration and deliver superior
customer care while maximizing operating margins. The key components of this
strategy include the following:
Leverage Proven Management Team. The Company's veteran management team has
extensive experience and past successes in the CLEC industry, and the Company
believes that its ability to combine and draw upon the collective talent and
expertise of its senior management gives it a competitive advantage in the
effective and efficient execution of network deployment, sales, provisioning,
service installation, billing and collection, and customer service functions.
Allegiance's Chairman and Chief Executive Officer, Royce J. Holland, has more
than 25 years of experience in the telecommunications and energy industries,
including as president, chief operating officer, and co-founder of MFS. Under
his leadership, MFS grew from a start-up operation to become the largest CLEC
with approximately $1.1 billion in revenues before its acquisition by WorldCom,
Inc. ("WorldCom") in 1996. Other key Allegiance executives have significant
experience in the critical functions of network operations, sales and marketing,
back office and OSS, finance and regulatory affairs.
Target End Users with Integrated Service Offerings. Allegiance plans to
focus principally on end user customers in the business, government and other
institutional market segments. The majority of these customers are expected to
be small and medium-sized businesses, to which the Company will offer "one-stop
shopping" consisting of a comprehensive package of communications services with
convenient integrated billing and a single point of contact for sales and
service. For large businesses and government and other institutional users,
which typically obtain telecommunications services from a variety of suppliers,
the Company will focus primarily on capturing a significant portion of these
customers' local exchange, intraLATA toll and data traffic. Although the Company
will principally target end users in markets where it believes it can achieve
significant market penetration by providing superior customer care at
competitive prices, the Company may augment its core business strategy by
selectively supplying wholesale services including equipment collocation and
facilities management services to Internet service providers ("ISPs").
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Offer Data, Internet, and Enhanced Services to Enhance Market Penetration
and Reduce Churn. The Company believes it can accelerate new account penetration
and reduce customer churn by offering Local Area Network ("LAN")
interconnection, frame relay, Internet services, Integrated Services Digital
Network ("ISDN"), Digital Subscriber Line ("DSL"), Web page design, Web server
hosting, and other enhanced services not generally available from the ILECs (or
available only at high prices) in conjunction with traditional local and long
distance services. This strategy has been successfully employed by certain
CLECs, and Allegiance's management team has extensive experience in providing
these types of enhanced services.
Utilize "Smart Build" Strategy to Maximize Speed to Market and Minimize
Investment Risk. Allegiance plans to deploy digital switching platforms with
local and long distance capability and initially lease fiber trunking capacity
from the ILECs and other CLECs to connect the Company's switch with its
transmission equipment collocated in ILEC central offices. Thereafter,
Allegiance may evolve its networks to the second and third stages of the "smart
build" strategy where Allegiance plans to lease dark fiber or overbuild specific
network segments as economically justified by traffic volume growth. Allegiance
expects that this "smart build" strategy will allow entry into a new market in a
six- to nine-month time frame as compared to the 18 to 24 months required to
construct a metropolitan area fiber network under the "build first, sell later"
approach required before the Telecommunications Act established a framework for
CLECs to acquire unbundled network elements. The Company believes that this
"smart build" approach has the additional advantage of reducing up-front capital
requirements. This "smart build" strategy is currently being implemented by the
Company in all its networks where it is leasing high capacity circuits to
connect the ILEC central offices with the Company's switches. In New York City,
the Company is moving towards the second stage of its "smart-build" strategy,
where the Company intends to lease from Metromedia Fiber Network, Inc. ("MFN"),
a thirty-mile dark fiber ring in Manhattan and extending into Brooklyn.
Achieve Broad Coverage of Attractive Areas within Each Targeted Market. As
a result of the substantial up-front capital requirements necessary to construct
metropolitan area fiber networks, CLECs have traditionally limited their initial
network buildout to highly concentrated downtown areas, thereby limiting their
ability to provide service to customers in other attractive, but geographically
dispersed, portions of their targeted markets. The Company intends to leverage
the benefits of using a "smart build" strategy by selectively deploying its
facilities to address attractive service areas throughout each target market in
order to optimize the Company's penetration. Prior to entering a market,
Allegiance prepares a detailed, "bottoms-up" analysis of that market's local
exchange areas using Federal Communications Commission ("FCC") and demographic
data. The Company uses this analysis, together with estimates of the costs and
potential benefits of addressing particular service areas, to identify
attractive areas, determine the optimal concentration of areas to be served and
develop its schedule for network deployment and expansion.
Maximize Operating Margins by Emphasizing Facilities-Based
Services. Allegiance believes that facilities-based solutions where the Company
provides local exchange, local access, and long distance using its own
facilities should generate significantly higher gross network margins than could
be obtained by reselling such services. As a result, Allegiance plans to deploy
its marketing activities in areas where it can serve customers through a direct
connection using unbundled loops or high capacity circuits connected to
Allegiance's facilities collocated in ILEC central offices. The Company plans to
resell ILEC services only in order to provide comprehensive geographical service
coverage to customers with multiple on-net sites (which can be addressed by the
Company's facilities-based services) and a few off-net sites (which can be
addressed only by the Company's reselling ILEC services).
Build Market Share by Focusing on Direct Sales. The Company believes that
the key to achieving its goals is the capturing and retaining of customers
through direct sales, a full suite of turn-key product offerings and
personalized customer care. Management believes that its targeted small and
medium-sized business customers have been neglected by the ILECs with respect to
these functions. The Company's sales management team is composed of executives
with experience in managing a large number of direct sales specialists in the
telecommunications and data networking industries. Additionally, the Company
believes it will be able to attract and retain highly qualified sales and
support personnel by offering them the opportunity to: (i) work with an
experienced and success-proven management team in building a developing,
entrepreneurial company; (ii) market a comprehensive set of products and
services and customer care options;
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and (iii) participate in the potential economic returns made available through a
results-oriented compensation package emphasizing sales commissions and stock
options.
Develop Efficient Automated Back Office Systems. Unburdened by existing
legacy OSS, Allegiance is focusing on developing, acquiring and integrating back
office systems to facilitate a smooth, efficient order management, provisioning,
trouble management, billing and collection, and customer service process. To
address this critical issue, the Company has hired a team of engineering and
information technology professionals experienced in the CLEC industry. This team
will work to develop, with the assistance of key third party vendors, OSS that
will synchronize multiple tasks such as provisioning, customer service and
billing and provide management with timely operating and financial data to most
efficiently direct network, sales and customer service resources. The Company
intends to work actively toward "electronic bonding" between the Allegiance OSS
and those of the ILEC, which would permit creation of service requests on-line.
Allegiance believes that these back office systems, once developed, will provide
it with a significant competitive advantage in terms of cost, processing large
order volumes and customer service as compared to companies using legacy
systems.
Expand Customer Base Through Potential Acquisitions. The Company believes
that strategic acquisitions may produce a number of benefits, including
acceleration of market penetration, providing a customer base for cross-selling
additional services, acquiring experienced management and improving margins by
migrating resold services to the Company's network facilities.
FINANCING PLAN
Allegiance's financing plan is predicated on the pre-funding of each
market's expansion to the point at which such market's operating cash flow is
sufficient to fund its operating costs and capital expenditures ("Positive Free
Cash Flow"). This approach is designed to allow the Company to be opportunistic
and raise capital on favorable terms and conditions.
To pre-fund each Phase I market's expansion to Positive Free Cash Flow, the
Company consummated the following transactions:
(i) In August 1997, Allegiance received equity commitments aggregating
$95 million from affiliates of four private equity investment funds with
extensive experience in financing telecommunications companies: Morgan
Stanley Capital Partners, Madison Dearborn Capital Partners, Frontenac
Company, and Battery Ventures (such affiliates collectively, the "Fund
Investors"). The Company simultaneously received an aggregate of $5 million
of equity commitments from certain members of the Allegiance management
team (the "Management Investors"). The equity commitments from the Fund
Investors and the Management Investors are collectively referred to as the
"Equity Commitments." Drawdowns of these Equity Commitments are subject to
certain conditions, including the approval of individual market business
plans and operating budgets by the Fund Investors and the Allegiance Board
of Directors. If an initial public offering or a sale, liquidation or
dissolution of the Company (a "Liquidity Event") has not occurred by August
13, 2004, the Company may be required, subject to the covenants in the
Indenture relating to the Notes, to repurchase the Fund Investors' and
Management Investors' equity securities, provided that any claim for
payment will be subordinated in right of payment to the Notes. See "Certain
Relationships and Related Transactions." The Company's initial equity
financing of approximately $50.1 million has been provided to fund the
Company's start-up costs and ongoing network development in the Dallas, New
York City and Atlanta markets (such amount, the "Equity Contributions");
and
(ii) the Company received approximately $240.7 million of net
proceeds, after deducting estimated underwriting discounts and commissions
and other expenses payable by the Company, from the sale of the Old Notes
in the Initial Offering.
Since completion of the Initial Offering, the Company has increased the
scope of its business plan to accommodate (i) an expansion of the Company's
network buildout in certain Phase I markets to include additional central
offices, thereby giving the Company access to a larger number of potential
customers in
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<PAGE> 9
those markets, (ii) an accelerated and expanded deployment of data, Internet and
enhanced services in the Company's markets and (iii) the acceleration of network
deployment in Phase II markets.
The Company estimates that its cumulative cash requirements to fund its
modified business plan, including pre-funding each Phase I and Phase II market's
expansion to Positive Free Cash Flow, will be between $650 million and $700
million. To finance this modified business plan, the Company intends as soon as
practicable, subject to market conditions, to consummate an offering of (i) its
Common Stock (the "Equity Offering") and (ii) additional unsecured,
unsubordinated notes, similar to and ranking pari passu with the New Notes, with
an initial aggregate principal amount of approximately $200 million (the "Debt
Offering," together with the Equity Offering, the "Offerings"). See "Description
of Certain Indebtedness -- Debt Offering." If the Equity Offering is
consummated, the Equity Commitments would terminate.
Although the Company would have the right to redeem up to 35% of the
principal amount at maturity of the Notes with the proceeds of the Equity
Offering under certain circumstances, the Company intends to use such proceeds
to fund its business plan. The Company believes, based on its modified business
plan, that the net proceeds from the Initial Offering and the Equity
Contributions, together with the anticipated proceeds from the Offerings, will
be sufficient to pre-fund its Phase I and Phase II market deployment to Positive
Free Cash Flow. There can be no assurance, however, that the Company will
consummate either the Equity Offering or the Debt Offering or that it will raise
sufficient funds in such Offerings to fund such deployment to Positive Free Cash
Flow. In such event, the Company would delay deployment of networks in all or
certain of the Phase II markets and may have to defer the expansion of its
network buildout in its Phase I markets and the expansion of deployment of data,
Internet and enhanced services.
The actual amount and timing of the Company's future capital requirements
may differ materially from the Company's estimates as a result of, among other
things, the demand for the Company's services and regulatory, technological and
competitive developments (including additional market developments and new
opportunities) in the Company's industry. The Company also expects that it will
require additional financing (or require financing sooner than anticipated) if:
(i) the Company's development plans or projections change or prove to be
inaccurate; (ii) the Company engages in any acquisitions; or (iii) the Company
alters the schedule or targets of its roll-out plan or, in the event the Equity
Offering, the Debt Offering, or both, are not consummated, the Company
accelerates the implementation of its network deployment in its Phase II
markets. Sources of additional financing may include commercial bank borrowings,
vendor financing, or the private or public sale of equity or debt securities.
There can be no assurance that such financing will be available on terms
acceptable to the Company or at all. See "Risk Factors -- Significant Capital
Requirements; Uncertainty of Additional Financing" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
RECENT DEVELOPMENTS
On February 3, 1998, the Company consummated the Initial Offering under
Rule 144A of the Securities Act, pursuant to which the Company issued and sold
445,000 units (the "Units"), each consisting of one Old Note and one warrant (a
"Warrant") to purchase .0034224719 shares of common stock, par value $.01 per
share of the Company. The Units were initially sold to Morgan Stanley & Co.
Incorporated; Salomon Brothers Inc; Bear, Stearns & Co. Inc.; and Donaldson,
Lufkin & Jenrette Securities Corporation (the "Initial Purchasers"). The
aggregate purchase price of the Units was $250,447,150 and the net proceeds to
the Company were approximately $240.7 million, after deducting estimated
underwriting discounts and commissions and other expenses payable by the
Company. The Old Notes were issued pursuant to the terms of the Indenture.
Concurrently with the consummation of the private placement, the Company and the
Initial Purchasers entered into a Registration Rights Agreement, dated as of
February 3, 1998 (the "Notes Registration Rights Agreement"), which grants the
holders of the Old Notes certain exchange and registration rights. The Exchange
Offer is intended to satisfy such exchange rights which terminate upon the
consummation of the Exchange Offer.
In February 1998, the Company hired C. Daniel Yost to serve as its
President and Chief Operating Officer. Mr. Yost brings to the Company over 26
years of experience in the telecommunications industry, most
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<PAGE> 10
recently as President and Chief Operating Officer for U.S. Operations of NETCOM
On-Line Communications Services, Inc., a leading Internet service provider. Mr.
Yost also serves as a member of the Company's Board of Directors.
In March 1998, Reed E. Hundt was elected to the Company's Board of
Directors. Mr. Hundt served as the chairman of the Federal Communications
Commission from 1993 to 1997. See "Management."
THE EXCHANGE OFFER
Securities Offered......... $445,000,000 aggregate principal amount at maturity
of Series B 11 3/4% Senior Discount Notes due 2008
of the Company.
The Exchange Offer......... $1,000 principal amount at maturity of New Notes in
exchange for each $1,000 principal amount at
maturity of Old Notes. As of the date hereof,
$445,000,000 aggregate principal amount at maturity
of Old Notes are outstanding. The Company will
issue the New Notes to holders on or promptly after
the Expiration Date.
Based on an interpretation by the staff of the
Commission set forth in no-action letters issued to
third parties, the Company believes that New Notes
issued pursuant to the Exchange Offer in exchange
for Old Notes may be offered for resale, resold and
otherwise transferred by any holder thereof (other
than any such holder which is an "affiliate" of the
Company within the meaning of Rule 405 under the
Securities Act) without compliance with the
registration and prospectus delivery provisions of
the Securities Act, provided that such New Notes
are acquired in the ordinary course of such
holder's business and that such holder does not
intend to participate and has no arrangement or
understanding with any person to participate in the
distribution of such New Notes. Each holder
accepting the Exchange Offer is required to
represent to the Company in the Letter of
Transmittal that, among other things, the New Notes
will be acquired by the holder in the ordinary
course of business and the holder does not intend
to participate and has no arrangement or
understanding with any person to participate in the
distribution of such New Notes.
Any Participating Broker-Dealer that acquired Old
Notes for its own account as a result of
market-making activities or other trading
activities may be a statutory underwriter. Each
Participating Broker-Dealer that receives New Notes
for its own account pursuant to the Exchange Offer
must acknowledge that it will deliver a Prospectus
in connection with any resale of such New Notes.
The Letter of Transmittal states that by so
acknowledging and by delivering a Prospectus, a
Participating Broker-Dealer will not be deemed to
admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as
it may be amended or supplemented from time to
time, may be used by a Participating Broker-Dealer
in connection with resale of New Notes received in
exchange for Old Notes where such Old Notes were
acquired by such Participating Broker-Dealer as a
result of market-making activities or other trading
activities. The Company has agreed that, for a
period of 180 days after the Expiration Date, it
will make this Prospectus available to any
Participating Broker-Dealer for use in connection
with any such resale. See "Plan of Distribution."
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<PAGE> 11
Any holder who tenders in the Exchange Offer with
the intention to participate, or for the purpose of
participating, in a distribution of the New Notes
could not rely on the position of the staff of the
Commission enunciated in no-action letters and, in
the absence of an exemption therefrom, must comply
with the registration and prospectus delivery
requirements of the Securities Act in connection
with any resale transaction. Failure to comply with
such requirements in such instance may result in
such holder incurring liability under the
Securities Act for which the holder is not
indemnified by the Company.
Expiration Date............ 5:00 p.m., New York City time, on ,
1998 unless the Exchange Offer is extended, in
which case the term "Expiration Date" means the
latest date and time to which the Exchange Offer is
extended.
Accreted Value and Accrued
Interest on the New Notes
and the Old Notes........ No cash interest will be payable in respect of the
New Notes prior to August 15, 2003. From and after
February 15, 2003, interest on the New Notes will
accrue on the principal amount at maturity at the
rate of 11 3/4% per annum and will be payable
semi-annually on each February 15 and August 15,
commencing August 15, 2003. The Old Notes will
continue to accrete at the rate of 11 3/4% per
annum to, but excluding, the date of issuance of
the New Notes. Any Old Notes not tendered or
accepted for exchange will continue to accrete at
the rate of 11 3/4% per annum in accordance with
their terms. The Accreted Value of New Notes upon
issuance will equal the Accreted Value of the Old
Notes accepted for exchange immediately prior to
issuance of the New Notes.
Conditions to the Exchange
Offer...................... The Exchange Offer is subject to certain customary
conditions, which may be waived by the Company. See
"The Exchange Offer -- Conditions."
Procedures for Tendering
Old Notes.................. Each holder of Old Notes wishing to accept the
Exchange Offer must complete, sign and date the
accompanying Letter of Transmittal, or a facsimile
thereof or transmit an Agent's Message in
connection with a book-entry transfer, in
accordance with the instructions contained herein
and therein, and mail or otherwise deliver such
Letter of Transmittal, or such facsimile, or such
Agent's Message, together with the Old Notes and
any other required documentation to the Exchange
Agent (as defined herein) at the address set forth
herein. By executing the Letter of Transmittal or
Agent's Message, each holder will represent to the
Company that, among other things, the New Notes
acquired pursuant to the Exchange Offer are being
obtained in the ordinary course of business of the
person receiving such New Notes, whether or not
such person is the holder, that neither the holder
nor any such other person (i) has any arrangement
or understanding with any person to participate in
the distribution of such New Notes, (ii) is
engaging or intends to engage in the distribution
of such New Notes, or (iii) is an "affiliate," as
defined under Rule 405 of the Securities Act, of
the Company. See "The Exchange Offer -- Purpose and
Effect of the Exchange Offer" and "-- Procedures
for Tendering."
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<PAGE> 12
Untendered Old Notes....... Following the consummation of the Exchange Offer,
holders of Old Notes eligible to participate but
who do not tender their Old Notes will not have any
further exchange rights and such Old Notes will
continue to be subject to certain restrictions on
transfer. Accordingly, the liquidity of the market
for such Old Notes could be adversely affected.
Consequences of Failure to
Exchange................. The Old Notes that are not exchanged pursuant to
the Exchange Offer will remain restricted
securities. Accordingly, such Old Notes may be
resold only (i) to the Company, (ii) pursuant to
Rule 144A or Rule 144 under the Securities Act or
pursuant to some other exemption under the
Securities Act, (iii) outside the United States to
a foreign person pursuant to the requirements of
Rule 904 under the Securities Act, or (iv) pursuant
to an effective registration statement under the
Securities Act. See "The Exchange
Offer -- Consequences of Failure to Exchange."
Shelf Registration
Statement.................. In the event applicable interpretations of the
staff of the Commission do not permit the Company
to effect the Exchange Offer, or under certain
other circumstances, the Company has agreed to
register the Old Notes on a shelf registration
statement (the "Shelf Registration Statement") and
use its best efforts to cause it to be declared
effective by the Commission. The Company has agreed
to maintain the effectiveness of the Shelf
Registration Statement for, under certain
circumstances, a maximum of two years, to cover
resales of the Old Notes held by any such holders.
Special Procedures for
Beneficial Owners.......... Any beneficial owner whose Old Notes are registered
in the name of a broker, dealer, commercial bank,
trust company or other nominee and who wishes to
tender should contact such registered holder
promptly and instruct such registered holder to
tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such owner's
own behalf, such owner must, prior to completing
and executing the Letter of Transmittal and
delivering its Old Notes, either make appropriate
arrangements to register ownership of the Old Notes
in such owner's name or obtain a properly completed
bond power from the registered holder. The transfer
of registered ownership may take considerable time.
The Company will keep the Exchange Offer open for
not less than twenty business days in order to
provide for the transfer of registered ownership.
Guaranteed Delivery
Procedures................. Holders of Old Notes who wish to tender their Old
Notes and whose Old Notes are not immediately
available or who cannot deliver their Old Notes,
the Letter of Transmittal or any other documents
required by the Letter of Transmittal to the
Exchange Agent (or comply with the procedures for
book-entry transfer) prior to the Expiration Date
must tender their Old Notes according to the
guaranteed delivery procedures set forth in "The
Exchange Offer -- Guaranteed Delivery Procedures."
Withdrawal Rights.......... Tenders may be withdrawn at any time prior to 5:00
p.m., New York City time, on the Expiration Date.
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<PAGE> 13
Acceptance of Old Notes and
Delivery of New Notes.... The Company will accept for exchange any and all
Old Notes which are properly tendered in the
Exchange Offer prior to 5:00 p.m., New York City
time, on the Expiration Date. The New Notes issued
pursuant to the Exchange Offer will be delivered
promptly following the Expiration Date. See "The
Exchange Offer -- Terms of the Exchange Offer."
Use of Proceeds............ There will be no cash proceeds to the Company from
the exchange pursuant to the Exchange Offer.
Exchange Agent............. The Bank of New York.
Certain United States
Federal Income Tax
Consequences............. The Company believes that the exchange of the New
Notes for the Old Notes will not be treated as an
"exchange" for federal income tax purposes, and as
a result there will be no federal income tax
consequences to holders exchanging Old Notes for
New Notes pursuant to the Exchange Offer. See
"Certain United States Federal Tax Considerations."
THE NEW NOTES
General.................... The form and terms of the New Notes are the same as
the form and terms of the Old Notes (which they
replace) except that (i) the New Notes bear a
Series B designation, (ii) the New Notes have been
registered under the Securities Act and, therefore,
will not bear legends restricting the transfer
thereof, and (iii) the holders of the New Notes
will not be entitled to certain rights under the
Notes Registration Rights Agreement, including the
provisions providing for liquidated damages in
certain circumstances relating to the timing of the
Exchange Offer, which rights will terminate when
the Exchange Offer is consummated. See "The
Exchange Offer -- Purpose and Effect of the
Exchange Offer." The New Notes will evidence the
same debt as the Old Notes and will be entitled to
the benefits of the Indenture. See "Description of
the Notes." The Old Notes and the New Notes are
referred to herein collectively as the "Notes."
Aggregate Amount........... $445,000,000 aggregate principal amount at maturity
of Series B 11 3/4% Senior Discount Notes due 2008.
Maturity................... February 15, 2008.
Yield and Interest......... The New Notes are being issued at a substantial
discount from their principal amount at maturity
and there will not be any payment of interest on
the Notes prior to August 15, 2003. For a
discussion of the U.S. federal income tax treatment
of the New Notes under the original issue discount
rules, see "Certain United States Federal Tax
Considerations." From and after February 15, 2003,
the Notes will bear interest, which will be payable
semi-annually in cash, at a rate of 11 3/4% per
annum on each February 15 and August 15, commencing
August 15, 2003.
Optional Redemption........ The New Notes will be redeemable at the option of
the Company, in whole or in part, at any time on or
after February 15, 2003, at 105.875% of their
principal amount at maturity, plus accrued
interest, declining ratably to 100% of their
principal amount at maturity, plus accrued
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<PAGE> 14
interest, on or after February 15, 2006. In
addition, prior to February 15, 2001, the Company
may redeem up to 35% of the aggregate principal
amount at maturity of the Notes with the net
proceeds of one or more Public Equity Offerings (as
defined herein) at 111.75% of their Accreted Value
on the redemption date; provided, however, that
after any such redemption at least $289.3 million
aggregate principal amount at maturity of the Notes
remains outstanding. See "Description of the
Notes -- Optional Redemption."
Change of Control.......... Upon a Change of Control (as defined herein), the
Company will be required to make an offer to
purchase the New Notes at a purchase price equal to
101% of their Accreted Value on the date of
purchase plus accrued interest, if any. There can
be no assurance that the Company will have
sufficient funds available at the time of any
Change of Control to make any required debt
repayment (including repurchases of the Notes). See
"Description of the Notes -- Repurchase of Notes
upon a Change of Control."
Ranking.................... The New Notes will be, as the Old Notes (which they
replace are), unsubordinated, unsecured
indebtedness of the Company, will rank pari passu
in right of payment with all unsubordinated,
unsecured indebtedness of the Company and will be
senior in right of payment to all subordinated
indebtedness of the Company. As of March 31, 1998,
the Company had no indebtedness other than the
Notes. See "Risk Factors -- Substantial Leverage;
Possible Inability to Service Indebtedness,"
"-- Holding Company Structure; Structural
Subordination of Notes," and "-- Effective
Subordination of Notes to Secured Indebtedness."
Certain Covenants.......... The Indenture contains certain covenants that,
among other things, restrict the ability of the
Company and its Restricted Subsidiaries (as defined
herein) to incur additional indebtedness, create
liens, engage in sale-leaseback transactions, pay
dividends or make distributions in respect of their
capital stock, redeem capital stock, make
investments or certain other restricted payments,
sell assets, issue or sell stock of Restricted
Subsidiaries, enter into transactions with
stockholders or affiliates or effect a
consolidation or merger. However, these limitations
are subject to a number of important qualifications
and exceptions. See "Risk Factors -- Restrictive
Covenants" and "Description of the
Notes -- Covenants."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors relating to the
Company, its business, and an investment in the New Notes. Prior to tendering
any Old Notes in exchange for New Notes, holders of Old Notes should carefully
consider such risk factors in addition to the other information contained in
this Prospectus.
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<PAGE> 15
RISK FACTORS
Prior to tendering their Old Notes in the Exchange Offer, holders of Old
Notes should carefully consider the following risk factors in addition to the
other information contained in this Prospectus.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes, as set forth in the legend thereon, as a
consequence of the issuance of the Old Notes pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities Act
and applicable state securities laws. The Company does not currently anticipate
that it will register the Old Notes under the Securities Act. Based on
interpretations by the staff of the Commission set forth in no-action letters
issued to third parties, including Exxon Capital Holdings Corporation, SEC
No-Action Letter (available April 13, 1988) (the "Exxon Capital Letter"), Morgan
Stanley & Co. Incorporated, SEC No-Action Letter (available June 5, 1991) (the
"Morgan Stanley Letter"), and similar letters, the Company believes that the New
Notes issued pursuant to the Exchange Offer may be offered for resale, resold or
otherwise transferred by any holder thereof (other than any such holder which is
an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act provided that such New Notes are acquired in
the ordinary course of such holder's business and such Holder has no arrangement
with any person to participate in the distribution of such New Notes.
Notwithstanding the foregoing, each broker-dealer that receives New Notes for
its own account pursuant to the Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any resale of such New Notes. The Letter
of Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with any resale of New Notes received in exchange for Old Notes where such Old
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities (other than Old Notes acquired directly
from the Company). The Company has agreed that, for a period of 180 days from
the Expiration Date, it will make this Prospectus available to any broker-dealer
for use in connection with any such resale. See "Plan of Distribution." Any
holder who tenders in the Exchange Offer for the purpose of participating in a
distribution of the New Notes cannot rely on the Morgan Stanley Letter or
similar letters and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction. To the extent that Old Notes are tendered and accepted in the
Exchange Offer, the trading market, if any, for the Old Notes not so tendered
could be adversely affected. See "The Exchange Offer."
FAILURE TO FOLLOW EXCHANGE OFFER PROCEDURES COULD ADVERSELY AFFECT HOLDERS
Issuance of the New Notes in exchange for the Old Notes pursuant to the
Exchange Offer will be made only after a timely receipt by the Company of such
Old Notes, a properly completed and duly executed Letter of Transmittal or
Agent's Message and all other required documents. Therefore, holders of the Old
Notes desiring to tender such Old Notes in exchange for New Notes should allow
sufficient time to ensure timely delivery. The Company is under no duty to give
notification of defects or irregularities with respect to the tenders of Old
Notes for exchange. Old Notes that are not tendered or are tendered but not
accepted will, following the consummation of the Exchange Offer, continue to be
subject to the existing restrictions upon transfer thereof, and, upon
consummation of the Exchange Offer, certain registration rights under the Notes
Registration Rights Agreement will terminate. In addition, any holder of Old
Notes who tenders in the Exchange Offer for the purpose of participating in a
distribution of the New Notes may be deemed to have received restricted
securities, and if so, will be required to comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction. Each broker-dealer that receives New Notes for its own
account in exchange for Old Notes, where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a Prospectus in connection
with any resale of such New Notes. See "Plan of Distribution." To the
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<PAGE> 16
extent that Old Notes are tendered and accepted in the Exchange Offer, the
trading market for untendered and tendered but unaccepted Old Notes could be
adversely affected. See "The Exchange Offer."
ABSENCE OF A PUBLIC MARKET COULD ADVERSELY AFFECT THE VALUE OF THE NOTES
Prior to this Exchange Offer, there has been no public market for the Old
Notes. The New Notes will constitute a new issue of securities with no
established trading market. The Company does not intend to apply for listing of
the New Notes on any securities exchange or for quotation through the Nasdaq
National Market. The Initial Purchasers have informed the Company that they
currently intend to make a market in the New Notes, but they are not obligated
to do so and may discontinue such market making at any time without notice.
Accordingly, no assurance can be given that an active public or other market for
the New Notes will develop for the New Notes. If a trading market does not
develop or is not maintained, holders of New Notes may experience difficulty in
reselling the New Notes or may be unable to sell them at all. If a public
trading market develops for the New Notes, future trading prices of such
securities will depend on many factors, including among other things, prevailing
interest rates, the Company's results of operations and the market for similar
securities and, depending on such factors, the New Notes may trade at a discount
from their principal amount.
LIMITED HISTORY OF OPERATIONS; HISTORICAL AND ANTICIPATED FUTURE NEGATIVE EBITDA
AND OPERATING LOSSES
The Company was formed in April 1997 and has generated operating losses and
negative cash flow from its limited operating activities to date. The Company's
primary activities have consisted of the procurement of governmental
authorizations, the acquisition of equipment and facilities, the hiring of
management and other key personnel, the raising of capital, the development,
acquisition and integration of OSS and other back office systems and the
negotiation of interconnection agreements. As of April 30, 1998, the Company has
made sales of 8,434 lines to 534 customers, of which, 5,757 lines for 329
customers were in service as of such date. As a result of the Company's limited
operating history, prospective investors have limited operating and financial
data about the Company upon which to base an evaluation of the Company's
performance and an investment in the Notes. The Company's ability to provide
"one-stop shopping" bundled telecommunications services on a widespread basis
and to generate operating profits and positive operating cash flow will depend
on its ability, among other things, to: (i) develop its operational support and
other back office systems; (ii) obtain state authorizations to operate as a CLEC
and any other required governmental authorizations; (iii) attract and retain an
adequate customer base; (iv) raise additional capital; (v) attract and retain
qualified personnel; and (vi) enter into and implement interconnection
agreements with ILECs. See "Business -- Business Strategy." There can be no
assurance that it will be able to achieve any of these objectives, generate
sufficient revenues to make principal and interest payments on the Notes or its
other indebtedness or compete successfully in the telecommunications industry.
The development of the Company's business and the deployment of its
services and systems will require significant capital expenditures, a
substantial portion of which will need to be incurred before the realization of
significant revenues. The Company expects to continue to generate negative
earnings before interest, income taxes, depreciation and amortization ("EBITDA")
while it emphasizes development, construction, and expansion of its
telecommunications services business and until the Company establishes a
sufficient revenue-generating customer base. For the three months ended March
31, 1998 and from inception (April 22, 1997) through December 31, 1997, the
Company had operating losses of $4.9 million and $3.6 million, net losses of
$8.7 million and $4.3 million (each after accrued redeemable preferred stock
dividends) and negative EBITDA of $4.7 million and $3.6 million, respectively.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations." The Company expects that each targeted market will generally
produce negative EBITDA for at least two to three years after operations
commence in such market, and the Company expects to experience increasing
operating losses and negative EBITDA as it expands its operations. There can be
no assurance that the Company will achieve or sustain profitability or generate
sufficient EBITDA to meet its working capital and debt service requirements,
which could have a material adverse effect on the Company and its ability to
meet its obligations on the Notes. See "-- Substantial Leverage; Possible
Inability to Service Indebtedness."
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SIGNIFICANT CAPITAL REQUIREMENTS; UNCERTAINTY OF ADDITIONAL FINANCING
The expansion and development of the Company's business and deployment of
its networks, services and systems will require significant capital to fund
capital expenditures, working capital, debt service and cash flow deficits. The
Company's principal capital expenditure requirements involve the purchase and
installation of collocation equipment, network switches and switch electronics
and network operations center expenditures. The Company estimates, based on its
current business plan, that its aggregate capital requirements (including
requirements to fund capital expenditures, working capital, debt service and
cash flow deficits) to fund the deployment and operation of its networks in all
Phase I and Phase II markets to Positive Free Cash Flow will total between
approximately $650 million and $700 million. Actual capital requirements may
vary based upon the timing and success of the Company's implementation of its
business plan.
Since the completion of the Initial Offering, the Company has increased the
scope of its business plan to accommodate (i) an expansion of the Company's
network buildout in certain Phase I markets to include additional central
offices, thereby giving the Company access to a larger number of potential
customers in those markets, (ii) an accelerated and expanded deployment of data,
Internet and enhanced services in the Company's markets and (iii) the
acceleration of network deployment in Phase II markets. The Company believes,
based on its modified business plan, that the net proceeds from the Initial
Offering and the Equity Contributions, together with the anticipated proceeds
from the Offerings, will be sufficient to pre-fund its Phase I and Phase II
market deployment to Positive Free Cash Flow. There can be no assurance,
however, that the Company will consummate either the Equity Offering or the Debt
Offering or that it will raise sufficient funds in such Offerings to fund such
deployment to Positive Free Cash Flow. In such event, the Company would delay
deployment of networks in all or certain of the Phase II markets and may have to
defer the expansion of its network buildout in its Phase I markets and the
expansion of deployment of data, Internet and enhanced services.
The actual amount and timing of the Company's future capital requirements
may differ materially from the Company's estimates as a result of, among other
things, the demand for the Company's services and regulatory, technological and
competitive developments (including additional market developments and new
opportunities) in the Company's industry. The Company's revenues and costs are
dependent upon factors that are not within the Company's control, such as
regulatory changes, changes in technology, and increased competition. Due to the
uncertainty of these factors, actual revenues and costs may vary from expected
amounts, possibly to a material degree, and such variations are likely to affect
the Company's future capital requirements. The Company also expects that it will
require additional financing (or require financing sooner than anticipated) if:
(i) the Company's development plans or projections change or prove to be
inaccurate; (ii) the Company engages in any acquisitions; or (iii) the Company
alters the schedule or targets of its roll-out plan or, in the event the Equity
Offering, the Debt Offering, or both, are not consummated, the Company
accelerates the implementation of its network deployment in its Phase II
markets. Sources of additional financing may include commercial bank borrowings,
vendor financing, or the private or public sale of equity or debt securities.
Availability of amounts under the Equity Commitments are contingent upon various
conditions. Drawdowns of Equity Commitments require, among other things, the
approval of individual market business plans and operating budgets by the Fund
Investors and the Allegiance Board of Directors. See "Certain Relationships and
Related Transactions."
There can be no assurance that the Company will be successful in raising
sufficient additional capital at all or on terms that it will consider
acceptable, that the terms of additional indebtedness are within the limitations
contained in the Company's financing agreements, including the Indenture, or
that the terms of such indebtedness will not impair the Company's ability to
develop its business. See "-- Restrictive Covenants." Failure to raise
sufficient funds may require the Company to modify, delay or abandon some of its
planned future expansion or expenditures, which could have a material adverse
effect on the Company and its ability to meet its obligations on the Notes. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
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BUSINESS DEVELOPMENT AND EXPANSION RISKS; POSSIBLE INABILITY TO MANAGE GROWTH
The Company is in the early stages of its operations and has only recently
begun to deploy networks in its first eight target markets. The success of the
Company will depend, among other things, upon the Company's ability to assess
potential markets, obtain required governmental authorizations, franchises and
permits, secure financing, market to, sell and provision new customers,
implement interconnection and collocation with ILEC facilities, lease adequate
trunking capacity from ILECs or other CLECs, purchase and install switches in
additional markets, implement efficient OSS and other back office systems, and
develop a sufficient customer base. The successful implementation of the
Company's business plan will result in rapid expansion of its operations and the
\provision of bundled telecommunications services on a widespread basis. Rapid
expansion of the Company's operations may place a significant strain on the
Company's management, financial and other resources.
The Company's ability to manage future growth, should it occur, will depend
upon its ability to develop efficient OSS and other back office systems, monitor
operations, control costs, maintain regulatory compliance, maintain effective
quality controls and significantly expand the Company's internal management,
technical, information and accounting systems and to attract, assimilate and
retain additional qualified personnel. See "-- Dependence on Key Personnel."
Failure of the Company to manage its future growth effectively could adversely
affect the expansion of the Company's customer base and service offerings. There
can be no assurance that the Company will successfully implement and maintain
such operational and financial systems or successfully obtain, integrate and
utilize the employees and management, operational and financial resources
necessary to manage a developing and expanding business in an evolving, highly
regulated and increasingly competitive industry. Any failure to expand these
areas and to implement and improve such systems, procedures and controls in an
efficient manner at a pace consistent with the growth of the Company's business
could have a material adverse effect on the Company and its ability to meet its
obligations on the Notes.
If the Company were unable to hire sufficient qualified personnel or
develop, acquire and integrate successfully its operational and information
systems, customers could experience delays in connection of service and/or lower
levels of customer service. Failure by the Company to meet the demands of
customers and to manage the expansion of its business and operations could have
a material adverse effect on the Company and its ability to meet its obligations
on the Notes.
DEPENDENCE ON KEY PERSONNEL
The Company is managed by a small number of key executive officers, most
notably Royce J. Holland, the Company's Chairman and Chief Executive Officer.
The loss of services of one or more of these key individuals, particularly Mr.
Holland, could materially and adversely affect the business of the Company and
its prospects. The Company believes that its success will depend in large part
on its ability to develop a large and effective sales force and its ability to
attract and retain highly skilled and qualified personnel. Most of the executive
officers of the Company, including the regional vice presidents of its operating
subsidiaries, do not have employment agreements, and the Company does not
maintain key person life insurance for any of its executive officers. Although
the Company has been successful in attracting and retaining qualified personnel,
the competition for qualified managers in the telecommunications industry is
intense and, accordingly, there can be no assurance that the Company will be
able to hire or retain necessary personnel in the future. The Company and two of
its executives have been named as defendants in a lawsuit by WorldCom relating
to the Company's hiring of certain former WorldCom employees. See
"Business -- Legal Proceedings."
DEPENDENCE ON BILLING, CUSTOMER SERVICE AND INFORMATION SYSTEMS
Sophisticated back office information and processing systems are vital to
the Company's growth and its ability to monitor costs, bill customers, provision
customer orders and achieve operating efficiencies. The Company's plans for the
development and implementation of these OSS rely, for the most part, on choosing
products and services offered by third party vendors and integrating such
products and services in-house to produce efficient operational solutions. There
can be no assurance that these systems will be successfully
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implemented on a timely basis or at all or will perform as expected. Failure of
these vendors to deliver proposed products and services in a timely and
effective manner and at acceptable costs, failure of the Company to adequately
identify all of its information and processing needs, failure of the Company's
related processing or information systems, failure of the Company to effectively
integrate such products or services, or the failure of the Company to upgrade
systems as necessary could have a material adverse effect on the Company and its
ability to meet its obligations on the Notes. In addition, the Company's right
to use these systems is dependent upon license agreements with third party
vendors. Certain of such agreements may be cancellable by the vendor and the
cancellation or nonrenewal of these agreements may have an adverse effect on the
Company.
While the Company believes that its systems will be year 2000 compliant,
there can be no assurance until the year 2000 occurs that all systems will then
function adequately. Further, if the systems of the ILECs, long distance
carriers and others on whose services the Company depends or with whom the
Company's systems interface are not year 2000 compliant, it could have a
material adverse effect on the Company and its ability to meet its obligations
on the Notes.
SUBSTANTIAL LEVERAGE; POSSIBLE INABILITY TO SERVICE INDEBTEDNESS
As a result of the Initial Offering, the Company is highly leveraged. The
Company's earnings for the three months ended March 31, 1998 and the period from
inception (April 22, 1997) through December 31, 1997 were insufficient to cover
fixed charges by $7.9 million and $3.5 million, respectively. After giving pro
forma effect to the Initial Offering and the Equity Contributions, as of March
31, 1998 and December 31, 1997, as if such transactions had occurred on January
1, 1998 and April 22, 1997, respectively, the Company's aggregate outstanding
indebtedness would have been $250.3 million and $264.4 million, its redeemable
preferred stock would have been $52.3 million and $51.9 million and the
Company's stockholders' deficit would have been $16.2 million and $28.6 million,
respectively. The Company's redeemable warrants would have been $8.2 million as
of March 31, 1998 and December 31, 1997. On a pro forma basis, giving effect to
the Initial Offering, as if such transaction had occurred on January 1, 1998 and
April 22, 1997, respectively, the Company's earnings before fixed charges would
have been insufficient to cover its fixed charges by $10.9 million for the three
months ended March 31, 1998 and $26.0 million for the period from April 22, 1997
(the date of inception) through December 31, 1997. See "Selected Financial
Data," "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity and Capital Resources," and "Description of the
Notes." The Company's leverage would increase if the Debt Offering were
consummated. If a Liquidity Event has not occurred by August 13, 2004, the
Company may be required, subject to the covenants in the Indenture, to
repurchase the Fund Investors' and Management Investors' preferred and common
stock at the higher of fair market value and original cost plus accrued
dividends at 12% per annum, provided that any claim for payment will be
subordinated in right of payment to the Notes. In addition, to fund the
deployment of its Phase II markets and any future acquisitions, the Company will
be required to raise additional financing through the Offerings or otherwise.
See "-- Significant Capital Requirements; Uncertainty of Additional Financing."
The Indenture limits, but does not prohibit, the incurrence of additional
indebtedness by the Company. In particular, the Indenture permits the Company
and its subsidiaries to incur an unlimited amount of indebtedness to finance the
cost of equipment, inventory and network assets. See "-- Restrictive Covenants."
The Company's high degree of leverage could have important consequences to
holders of Notes, including but not limited to: (i) impairing the Company's
ability to obtain additional financing for working capital, capital
expenditures, acquisitions or general corporate purposes; (ii) requiring the
Company to dedicate a substantial portion of its cash flow from operations to
the payment of principal and interest on its indebtedness, thereby reducing the
funds available to the Company for its operations and other purposes, including
acquisitions and investments in product development and capital spending; (iii)
placing the Company at a competitive disadvantage with those of its competitors
which are not as highly leveraged as the Company; (iv) impairing the Company's
ability to adjust rapidly to changing market conditions; and (v) making the
Company more vulnerable in the event of a downturn in general economic
conditions or in its business or of changing market conditions and regulations.
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<PAGE> 20
There can be no assurance that the Company will be able to meet its debt
service obligations. If the Company is unable to generate sufficient cash flow
or otherwise obtain funds necessary to make required payments, or if the Company
otherwise fails to comply with the various covenants in its debt obligations, it
would be in default under the terms thereof, which would permit the holders of
such indebtedness to accelerate the maturity of such indebtedness and could
cause defaults under other indebtedness of the Company. The Company's ability to
repay or to refinance its obligations with respect to its indebtedness will
depend on its future financial and operating performance, which, in turn, will
be subject to prevailing economic and competitive conditions and to certain
financial, business and other factors, many of which are beyond the Company's
control. These factors could include operating difficulties, increased operating
costs, pricing pressures, the response of competitors, regulatory developments,
and delays in implementing strategic projects.
The successful implementation of the Company's business strategy, including
deployment of its networks and obtaining and retaining a significant number of
customers, and significant and sustained growth in the Company's cash flow are
necessary for the Company to be able to meet its debt service and working
capital requirements. There can be no assurance that the Company will
successfully implement its business strategy, that the anticipated results of
its strategy will be realized, or that the Company will be able to generate
sufficient cash flow from operating activities to meet its debt service
obligations and working capital requirements. See "Business -- Business
Strategy." If the Company's cash flow and capital resources are insufficient to
fund its debt service and working capital obligations, the Company may be forced
to reduce or delay capital expenditures (including switch and network
expenditures), sell assets, or seek to obtain additional equity capital, or to
refinance or restructure its debt. A disposition of assets in order to make up
for any shortfall in the payments due on the Company's indebtedness could take
place under circumstances that might not be favorable to realizing the highest
price for such assets. There can be no assurance that the Company's cash flow
and capital resources will be sufficient for payment of principal of, and
premium, if any, and interest on, its indebtedness (including the Notes) in the
future, or that any such alternative measures would be successful or would
permit the Company to meet its debt service and working capital obligations.
CONTROL BY VENTURE INVESTORS; POTENTIAL CONFLICTS OF INTEREST
The Fund Investors, through their significant equity ownership, have the
ability to control the direction and future operations of the Company. See
"Management -- Election of Directors; Voting Agreement," "Security Ownership of
Certain Beneficial Owners and Management" and "Certain Relationships and Related
Transactions." Certain decisions concerning the operations or financial
structure of the Company may present conflicts of interest between the Fund
Investors and Management Investors and the holders of the Notes. For example, if
the Company encounters financial difficulties or is unable to pay its debts as
they mature, the interest of these investors may conflict with those of the
holders of Notes. In addition, these investors may have an interest in pursuing
acquisitions, divestitures, financings or other transactions that, in their
judgment, could enhance their equity investment in the Company, even though such
transactions might involve increased risk to the holders of the Notes. In
addition to their investment in the Company, the Fund Investors or their
affiliates currently have significant investments in other telecommunications
companies and may in the future invest in other entities engaged in the
telecommunications business or in related businesses (including entities engaged
in business in areas in which the Company operates). As a result, these
investors have, and may develop, relationships with businesses that are or may
be competitive with the Company. Conflicts may also arise in the negotiation or
enforcement of arrangements entered into by the Company and entities in which
these investors have an interest. In addition, the Company and these investors
have agreed that such investors are under no obligation to bring to the Company
any investment or business opportunities of which they become aware, even if
such opportunities are within the scope and objectives of the Company.
HOLDING COMPANY STRUCTURE; STRUCTURAL SUBORDINATION OF NOTES
Substantially all of the Company's outstanding capital stock is held by
Allegiance Telecom, L.L.C. ("Allegiance LLC"), which is principally controlled
by the Fund Investors and the Management Investors. The Company is a holding
company and its principal assets consist of the common stock of its operating
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<PAGE> 21
subsidiaries. The Company will rely upon dividends and other payments from its
subsidiaries to generate the funds necessary to meet its obligations, including
the payment of principal of and interest on the Notes. The subsidiaries,
however, are legally distinct from the Company and such subsidiaries will have
no obligation, contingent or otherwise, to pay amounts due pursuant to the Notes
or to make funds available for such payment. The Company's subsidiaries will not
guarantee the Notes. The ability of the Company's subsidiaries to make such
payments to the Company will be subject to, among other things, the availability
of funds, the terms of such subsidiaries' indebtedness and applicable state
laws. Claims of creditors of the Company's subsidiaries, including trade
creditors, will generally have priority as to the assets of such subsidiaries
over the claims of the holders of the Company's indebtedness, including the
Notes. Accordingly, the Notes will be effectively subordinated to the
liabilities (including trade payables) of the subsidiaries of the Company.
EFFECTIVE SUBORDINATION OF NOTES TO SECURED INDEBTEDNESS
The Notes will not be secured by any of the Company's or its subsidiaries'
assets. The Indenture does not limit the amount of indebtedness the Company may
incur to finance the acquisition of inventory, equipment or network assets and
permits the Company to secure such indebtedness. For example, no consent is
required under the Indenture for the Company to consummate the Debt Offering.
The Indenture also permits the Company to incur up to $100 million of
unsubordinated indebtedness and to secure such indebtedness. See "Description of
the Notes -- Covenants." In the event that a default were to occur with respect
to any of the Company's secured indebtedness and the holders thereof were to
foreclose on the collateral, or in the event of a bankruptcy, liquidation or
reorganization of the Company, the holders of such indebtedness would be
entitled to payment out of the proceeds of their collateral prior to any holders
of general unsecured indebtedness, including the Notes, notwithstanding the
existence of an event of default with respect to the Notes. Also, to the extent
that the value of such collateral is insufficient to satisfy such secured
indebtedness, holders of amounts remaining outstanding on such secured
indebtedness would be entitled to share pari passu with holders of the Notes
with respect to any other assets of the Company. Such assets may not be
sufficient to pay amounts due on any or all of the Notes then outstanding.
RESTRICTIVE COVENANTS
The Indenture, and the agreements entered into in connection with the
Equity Commitments contain a number of covenants that will limit the discretion
of the Company's management with respect to certain business matters. These
covenants, among other things, restrict the ability of the Company to incur
additional indebtedness, pay dividends and make other distributions, prepay
subordinated indebtedness, make investments and other restricted payments, enter
into sale and leaseback transactions, create liens, sell assets, and engage in
certain transactions with affiliates. See "Certain Relationships and Related
Transactions" and "Description of the Notes."
A failure to comply with the covenants and restrictions contained in the
Indenture, or agreements relating to any subsequent financing could result in an
event of default under such agreements which could permit acceleration of the
related debt and acceleration of debt under other debt agreements that may
contain cross-acceleration or cross-default provisions, and the commitments of
the lenders to make further extensions under such other agreements could be
terminated.
POSSIBLE REDEMPTION OF THE NOTES IN CONNECTION WITH THE EQUITY OFFERING
Prior to February 15, 2001, the Company has the right to redeem up to 35%
of the original aggregate principal amount at maturity of the Notes with the
proceeds of one or more Public Equity Offerings, which term would include the
Equity Offering, at a price equal to 111.75% of their Accreted Value on the
redemption date, provided that after any such redemption at least $289.3 million
of the aggregate principal amount at maturity of the Notes remains outstanding.
Although the Company currently does not intend to redeem any of the Notes with
the proceeds from the Equity Offering, there can be no assurance that the
Company will not effect such redemption, or that the Company will not redeem a
portion of the Notes with a future Public Equity Offering. In the event the
Company uses a portion of the proceeds of the Equity Offering, or a future
Public Equity Offering, to redeem a portion of the Notes, the holders of the
Notes called for redemption will be required to surrender such Notes for
redemption. See "Description of the Notes -- Optional Redemption."
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DIFFICULTIES IN IMPLEMENTING LOCAL AND ENHANCED SERVICES
The Company has begun, and plans to continue, to deploy high capacity
digital switches in the cities in which it will operate networks and plans
initially to rely on ILEC or CLEC facilities for certain aspects of
transmission. Subject to obtaining interconnection, this will enable the Company
to offer a variety of switched access services, enhanced services and local dial
tone. Although under the Telecommunications Act the ILECs will be required to
unbundle network elements and permit the Company to purchase only the
origination and termination services it needs, thereby decreasing operating
expenses, there can be no assurance that such unbundling will be effected in a
timely manner and result in prices favorable to the Company. In addition, the
Company's ability to implement successfully its switched and enhanced services
will require the negotiation of resale agreements with ILECs and other CLECs and
the negotiation of interconnection and collocation agreements with ILECs, which
can take considerable time, effort and expense and are subject to federal, state
and local regulation.
In August 1996, the FCC released a decision implementing the
interconnection portions of the Telecommunications Act (the "Interconnection
Decision"). The Interconnection Decision establishes rules for negotiating
interconnection agreements and guidelines for review of such agreements by state
public utilities commissions. On July 18, 1997, the United States Court of
Appeals for the Eighth Circuit (the "Eighth Circuit") vacated certain portions
of the Interconnection Decision, including provisions establishing a pricing
methodology for unbundled network elements and a procedure permitting new
entrants to "pick and choose" among various provisions of existing
interconnection agreements between ILECs and their competitors. On October 14,
1997, the Eighth Circuit issued a decision vacating additional FCC rules that
will likely have the effect of increasing the cost of obtaining the use of
combinations of an ILEC's unbundled network elements. The Eighth Circuit
decision creates uncertainty about the rules governing pricing, terms and
conditions of interconnection agreements, and could make negotiating and
enforcing such agreements more difficult and protracted and may require
renegotiation of existing agreements. See "-- Competition." The Supreme Court
has granted a writ of certiorari to review the Eighth Circuit decision. Many new
carriers have experienced difficulties in working with the ILECs with respect to
provisioning, interconnection, collocation and implementing the systems used by
these new carriers to order and receive unbundled network elements and wholesale
services from the ILECs. Coordination with ILECs is necessary for new carriers
such as the Company to provide local service to customers on a timely and
competitive basis. The FCC has recently created a task force to examine problems
that have slowed the development of local telephone competition. In addition,
the Telecommunications Act created incentives for regional Bell operating
companies ("RBOCs") to cooperate with new carriers and permit access to their
facilities by denying the RBOCs the ability to provide in-region long distance
services until there is adequate competition at the local level. A federal
District Court has recently held these provisions of the Telecommunications Act
unconstitutional, which decision is subject to appeal. See "-- Government
Regulation." The ILECs in the Company's markets are not yet permitted by the FCC
to offer long distance services and there can be no assurance that these ILECs
will be accommodating to the Company once they are permitted to offer long
distance service. If the Company is unable to obtain the cooperation of an ILEC
in a region, whether or not such ILEC has been authorized to offer long distance
service, the Company's ability to offer local services in such region on a
timely and cost-effective basis would be adversely affected.
A number of ILECs around the country have been contesting whether the
obligation to pay reciprocal compensation to CLECs should apply to local
telephone calls terminating to ISPs. The ILECs claim that this traffic is
interstate in nature and therefore should be exempt from compensation
arrangements applicable to local, intrastate calls. The FCC, however, has
determined on a number of occasions, most recently in its May 16, 1997 access
charge reform order, that calls to ISPs should be exempt from interstate access
charges and should be governed by local exchange tariffs. Currently, the state
commissions in Delaware, Maryland, Missouri, New York, North Carolina, Oklahoma,
Pennsylvania, Virginia, Arizona, Connecticut, Colorado, Illinois, Michigan,
Minnesota, Oregon, Washington, West Virginia and Texas have ruled that
reciprocal compensation arrangements do apply to ISP traffic. However, the Texas
Public Utility Commission indicated that it would examine in the near future
whether per-minute compensation is the best way to handle Internet traffic in
future contracts. Disputes over the appropriate treatment of ISP traffic are
pending in California, Georgia and Massachusetts. The National Association of
Regulatory Utility Commissioners ("NARUC")
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adopted a resolution in favor of reciprocal compensation for ISP traffic. The
Company anticipates that ISPs will be among its target customers, and adverse
decisions in these proceedings could limit the Company's ability to serve this
group of customers profitably.
The profitability of the Company's Internet access services, and related
services such as Web site hosting, may be affected by its ability to obtain
"peering" arrangements with ISPs. In recent years, major ISPs routinely
exchanged traffic with other ISPs that met certain technical criteria on a
"peering" basis, meaning that each ISP accepted traffic routed to Internet
addresses on its system from its "peers" on a reciprocal basis, without payment
of compensation. In 1997, however, UUNET Technologies, Inc. ("UUNET"), the
largest ISP, announced that it intends to greatly restrict its use of peering
arrangements with other providers, and would impose charges for accepting
traffic from providers other than its "peers." Other major ISPs have reportedly
adopted similar policies. There can be no assurance that the Company will be
able to negotiate "peer" status with any of the major nationwide ISPs, or that
it will be able to terminate traffic on ISPs' networks at favorable prices. In
addition, the pending merger between WorldCom (UUNET's parent) and MCI (another
major ISP) is expected to increase the concentration of market power for ISP
backbone services, and may adversely affect the Company's ability to obtain
favorable peering terms.
The Company is a recent entrant into the newly created competitive local
telecommunications services industry. The local dial tone services market in
most states was only recently opened to competition due to the passage of the
Telecommunications Act and related regulatory rulings. There are numerous
operating complexities associated with providing these services. The Company
will be required to develop new products, services and systems and will need to
develop new marketing initiatives to sell these services.
The Company's switched services may not be profitable due to, among other
factors, lack of customer demand, inability to secure access to ILEC facilities
on acceptable terms, and competition and pricing pressure from the ILECs and
other CLECs. There can be no assurance that the Company will be able to
successfully implement its switched and enhanced services strategy.
Implementation of the Company's switched and enhanced services is also
dependent upon equipment manufacturers' ability to meet the Company's switch
deployment schedule. There can be no assurance that switches will be deployed on
the schedule contemplated by the Company or that, if deployed, such switches
will be utilized to the degree contemplated by the Company.
DEPENDENCE ON LEASED TRUNKING CAPACITY; FUTURE NEED TO OBTAIN PERMITS,
RIGHTS-OF-WAY, AND OTHER THIRD-PARTY AGREEMENTS
Under the Company's "smart build" strategy, the Company will initially seek
to lease from ILECs and other CLECs local fiber trunking capacity connecting the
Allegiance switch to particular ILEC central offices and then replace this
leased trunk capacity in the future with its own fiber on a "success basis" as
warranted by traffic volume growth. There can be no assurance that all such
required trunking capacity will be available to the Company on a timely basis or
on terms acceptable to the Company. The failure to obtain such leased fiber
could delay the Company's ability to penetrate certain market areas or require
it to make additional unexpected up-front capital expenditures to install its
own fiber and could have a material adverse effect on the Company and its
ability to meet its obligations on the Notes. If and when the Company seeks to
install its own fiber, the Company must obtain local franchises and other
permits, as well as rights-of-way to utilize underground conduit and aerial pole
space and other rights-of-way from entities such as ILECs and other utilities,
railroads, long distance companies, state highway authorities, local governments
and transit authorities. There can be no assurance that the Company will be able
to obtain and maintain the franchises, permits and rights needed to implement
its network buildout on acceptable terms. The failure to enter into and maintain
any such required arrangements for a particular network may affect the Company's
ability to develop that network and may have a material adverse effect on the
Company. See "Business -- Network Architecture."
RISKS RELATING TO LONG DISTANCE BUSINESS
As part of its "one-stop shopping" offering of bundled telecommunications
services to its customers, the Company plans to offer long distance services to
its customers. The long distance business is extremely
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competitive and prices have declined substantially in recent years and are
expected to continue to decline. In addition, the long distance industry has
historically had a high average churn rate, as customers frequently change long
distance providers in response to the offering of lower rates or promotional
incentives by competitors. The Company will initially rely on other carriers to
provide transmission and termination services for all of its long distance
traffic. The Company will need resale agreements with long distance carriers to
provide it with transmission services. Such agreements typically provide for the
resale of long distance services on a per-minute basis and may contain minimum
volume commitments. Negotiation of these agreements involves estimates of future
supply and demand for transmission capacity as well as estimates of the calling
pattern and traffic levels of the Company's future customers. In the event the
Company fails to meet its minimum volume commitments, it may be obligated to pay
underutilization charges and in the event it underestimates its need for
transmission capacity, the Company may be required to obtain capacity through
more expensive means.
COMPETITION
The telecommunications industry is highly competitive. In each of the
markets targeted by the Company, the Company will compete principally with the
ILEC serving that area. ILECs are established providers of local telephone
services to all or virtually all telephone subscribers within their respective
service areas. ILECs also have long-standing relationships with regulatory
authorities at the federal and state levels. While recent FCC administrative
decisions and initiatives provide increased business opportunities to
telecommunications providers such as the Company, they also provide the ILECs
with increased pricing flexibility for their private line and special access and
switched access services. In addition, with respect to competitive access
services (as opposed to switched local exchange services), the FCC recently
proposed a rule that would provide for increased ILEC pricing flexibility and
deregulation for such access services either automatically or after certain
competitive levels are reached. If the ILECs are allowed by regulators to offer
discounts to large customers through contract tariffs, engage in aggressive
volume and term discount pricing practices for their customers, and/or seek to
charge competitors excessive fees for interconnection to their networks, ILEC
competitors such as the Company could be materially adversely affected. If
future regulatory decisions afford the ILECs increased access services pricing
flexibility or other regulatory relief, such decisions could also have a
material adverse effect on ILEC competitors such as the Company.
The Company also faces, and expects to continue to face, competition from
other current and potential market entrants, including long distance carriers
seeking to enter, reenter or expand entry into the local exchange marketplace
such as AT&T Corp. ("AT&T"), MCI Communications Corporation ("MCI"), Sprint
Corporation ("Sprint"), and WorldCom, and from other CLECs, resellers,
competitive access providers ("CAPs"), cable television companies, electric
utilities, microwave carriers, wireless telephone system operators and private
networks built by large end users. In addition, the development of new
technologies could give rise to significant new competitors to the Company. The
Company also competes with equipment vendors and installers, and
telecommunications management companies with respect to certain portions of its
business. Many of the Company's current and potential competitors have
financial, technical, marketing, personnel and other resources, including brand
name recognition, substantially greater than those of the Company, as well as
other competitive advantages over the Company.
The Telecommunications Act includes provisions which impose certain
regulatory requirements on all local exchange carriers, including ILEC
competitors such as the Company, while granting the FCC expanded authority to
reduce the level of regulation applicable to any or all telecommunications
carriers, including ILECs. The manner in which these provisions of the
Telecommunications Act are implemented and enforced could have a material
adverse effect on the Company's ability to successfully compete against ILECs
and other telecommunications service providers.
As a recent entrant in the integrated telecommunications services industry,
the Company has not achieved and does not expect to achieve a significant market
share for any of its services. In particular, the ILECs have long-standing
relationships with their customers, have financial, technical, marketing,
personnel and other resources substantially greater than those of the Company,
have the potential to subsidize competitive services with revenues from a
variety of businesses and currently benefit from existing regulations
20
<PAGE> 25
that favor the ILECs over the Company in certain respects. While recent
regulatory initiatives, which allow CLECs such as the Company to interconnect
with ILEC facilities, provide increased business opportunities for the Company,
such interconnection opportunities have been accompanied by increased pricing
flexibility for and relaxation of regulatory oversight of the ILECs.
To the extent the Company interconnects with and uses ILEC networks to
service its customers, the Company will be dependent upon the technology and
capabilities of the ILECs to meet certain telecommunications needs of the
Company's customers and to maintain its service standards, and the Company must
interface with the ILECs' legacy OSS in order to properly provision new
customers. The Telecommunications Act imposes interconnection obligations on
ILECs, but there can be no assurance that the Company will be able to obtain the
interconnection it requires at rates, and on terms and conditions, that permit
the Company to offer switched services that are both competitive and profitable.
See "-- Difficulties in Implementing Local and Enhanced Services." In the event
that the Company experiences difficulties in obtaining high quality, reliable
and reasonably priced services from the ILECs, the attractiveness of the
Company's services to its customers could be impaired.
The long distance telecommunications market has numerous entities competing
for the same customers and a high average churn rate, as customers frequently
change long distance providers in response to the offering of lower rates or
promotional incentives. Prices in the long distance market have declined
significantly in recent years and are expected to continue to decline. The
Company will face competition from large carriers such as AT&T, MCI, Sprint, and
WorldCom. Other competitors are likely to include RBOCs providing out-of-region
(and, with the removal of regulatory barriers, in-region) long distance
services, other CLECs, microwave and satellite carriers and private networks
owned by large end users. See "-- Government Regulation." The Company may also
increasingly face competition from companies offering long distance data and
voice services over the Internet. Such companies could enjoy a significant cost
advantage because they do not currently pay carrier access charges or universal
service fees.
The Internet services market is highly competitive and the Company expects
that competition will continue to intensify. The Company's competitors in this
market include ISPs, other telecommunications companies, online services
providers and Internet software providers. Many of these competitors have
greater financial, technological, marketing, personnel and other resources than
those available to the Company.
The Company believes that the principal competitive factors affecting its
business operations are pricing levels and clear pricing policies, reliable
customer service, accurate billing and, to a lesser extent, variety of services.
The ability of the Company to compete effectively will depend upon its continued
ability to maintain high quality, market-driven services at prices generally
equal to or below those charged by its competitors. To maintain its competitive
posture, the Company believes that it must be in a position to reduce its prices
in order to meet reductions in rates, if any, offered by others. Any such
reductions could adversely affect the Company.
The recent World Trade Organization ("WTO") agreement on basic
telecommunications services could increase the level of competition faced by the
Company. Under this agreement, the United States and 72 other members of the WTO
committed themselves to opening their respective telecommunications markets
and/or foreign ownership and/or to adopting regulatory measures to protect
competitors against anticompetitive behavior by dominant telecommunications
companies, effective in some cases as early as January 1998. There can be no
assurance that the pro-competitive effects of the WTO agreement will not have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Competition."
A continuing trend toward consolidation, mergers, acquisitions and
strategic alliances in the telecommunications industry could also increase the
level of competition faced by the Company. For example, WorldCom acquired MFS in
December 1996, has recently acquired another CLEC, Brooks Fiber Properties,
Inc., and has a pending agreement to merge with MCI. In January 1998 AT&T
announced its intention to acquire Teleport Communications Group Inc. These
types of consolidations and alliances could put the Company at a competitive
disadvantage.
21
<PAGE> 26
GOVERNMENT REGULATION
The Company's networks and the provision of telecommunications services are
subject to significant regulation at the federal, state and local levels. Delays
in receiving required regulatory approvals or the enactment of new adverse
regulation or regulatory requirements may have a material adverse effect upon
the Company and its ability to meet its obligations on the Notes.
The FCC exercises jurisdiction over the Company with respect to interstate
and international services. Additionally, the Company files tariffs with the
FCC. On October 29, 1996, the FCC approved an order that eliminates the tariff
filing requirements for interstate domestic long distance service provided by
non-dominant carriers such as the Company. On February 13, 1997, the United
States Court of Appeals for the District of Columbia Circuit stayed the FCC
order, and the Company is required to continue filing tariffs while this stay
remains in effect. If the stay is lifted and the FCC order becomes effective,
telecommunications carriers such as the Company will no longer be able to rely
on the filing of tariffs with the FCC as a means of providing notice to
customers of prices, terms, and conditions on which they offer interstate
services. While tariffs offered a means of providing notice of prices, terms,
and conditions, the Company intends to rely primarily on its sales force and
direct marketing to provide such information to its customers. In addition, the
Company must obtain (and has obtained through its subsidiary, Allegiance Telecom
International, Inc.) prior FCC authorization for installation and operation of
international facilities and the provision (including resale) of international
long distance services.
State regulatory commissions exercise jurisdiction over the Company to the
extent it provides intrastate services. As such a provider, the Company is
required to obtain regulatory authorization and/or file tariffs at state
agencies in most of the states in which it operates. If and when the Company
seeks to overbuild certain network segments, local authorities regulate the
Company's access to municipal rights-of-way. Network buildouts are also subject
to numerous local regulations such as building codes and licensing. Such
regulations vary on a city by city and county by county basis. See
"Business -- Regulation."
There can be no assurance that the FCC or state commissions will grant
required authority or refrain from taking action against the Company if it is
found to have provided services without obtaining the necessary authorizations.
If authority is not obtained or if tariffs are not filed, or are not updated, or
otherwise do not fully comply with the tariff filing rules of the FCC or state
regulatory agencies, third parties or regulators could challenge these actions.
Such challenges could cause the Company to incur substantial legal and
administrative expenses.
The Telecommunications Act provides for a significant deregulation of the
domestic telecommunications industry, including the local exchange, long
distance and cable television industries. The Telecommunications Act remains
subject to judicial review and additional FCC rulemaking, and thus it is
difficult to predict what effect the legislation will have on the Company and
its operations. There are currently many regulatory actions underway and being
contemplated by federal and state authorities regarding interconnection pricing
and other issues that could result in significant changes to the business
conditions in the telecommunications industry. There can be no assurance that
these changes will not have a material adverse effect upon the Company.
On December 31, 1997, the U.S. District Court for the Northern District of
Texas issued a decision (the "SBC Decision") finding that Sections 271 to 275 of
the Telecommunications Act are unconstitutional. These sections of the
Telecommunications Act impose restrictions on the lines of business in which the
RBOCs may engage, including establishing the conditions they must satisfy before
they may provide in-region interLATA telecommunications services. The SBC
Decision has been stayed pending appeal. If the SBC Decision is upheld on
appeal, however, the RBOCs would be able to provide such in-region services
immediately without satisfying the statutory conditions. This would likely have
an unfavorable effect on the Company's business for at least two reasons. First,
the SBC Decision removes the incentive RBOCs have to cooperate with companies
like Allegiance to foster competition within their service areas so that they
can qualify to offer in-region interLATA services because the decision allows
RBOCs to offer such services immediately. However, the SBC Decision does not
affect other provisions of the Telecommunications Act which create legal
obligations for all ILECs to offer interconnection and network access. Second,
the Company is legally able to offer its customers both long distance and local
exchange services, which the RBOCs currently may not do. This
22
<PAGE> 27
ability to offer "one-stop shopping" gives the Company a marketing advantage
that it would no longer enjoy if the SBC Decision were upheld on appeal.
In addition to requirements placed on ILECs, the Telecommunications Act
subjects the Company to certain federal regulatory requirements relating to the
provision of local exchange service in a market. All ILECs and CLECs must
interconnect with other carriers, provide nondiscriminatory access to
rights-of-way, offer reciprocal compensation for termination of traffic, and
provide dialing parity and telephone number portability. The Telecommunications
Act also requires all telecommunications carriers to ensure that their services
are accessible to and usable by persons with disabilities.
On May 8, 1997, the FCC released an order establishing a significantly
expanded federal universal service subsidy regime. For example, the FCC
established new subsidies for telecommunications and information services
provided to qualifying schools and libraries with an annual cap of $2.3 billion
and for services provided to rural health care providers with an annual cap of
$400.0 million. The FCC also expanded the federal subsidies for local exchange
telephone service provided to low-income consumers. Providers of interstate
telecommunications service, such as the Company, as well as certain other
entities, must pay for these programs. The Company's share of these federal
subsidy funds will be based on its share of certain defined telecommunications
end-user revenues. Currently, the FCC is assessing such payments on the basis of
a provider's revenue for the previous year; since the Company had no significant
revenues in 1997, it will not be liable for subsidy payments in any material
amount during 1998. With respect to subsequent years, however, the Company is
currently unable to quantify the amount of subsidy payments that it will be
required to make and the effect that these required payments will have on its
financial condition. In the May 8th order, the FCC also announced that it will
soon revise its rules for subsidizing service provided to consumers in high cost
areas, which may result in further substantial increases in the overall cost of
the subsidy program. Several parties have appealed the May 8th order. Such
appeals have been consolidated and transferred to the United States Court of
Appeals for the Fifth Circuit where they are currently pending. In addition, on
July 3, 1997, several ILECs filed a petition for stay of the May 8th order with
the FCC. That petition is pending, as well as several petitions for
administrative reconsideration of the order.
To the extent the Company provides interexchange telecommunications
service, it is required to pay access charges to ILECs when it uses the
facilities of those companies to originate or terminate interexchange calls.
Also, as a CLEC, the Company provides access services to other interexchange
service providers. The interstate access charges of ILECs are subject to
extensive regulation by the FCC, while those of CLECs are subject to a lesser
degree of FCC regulation but remain subject to the requirement that all charges
be just, reasonable, and not unreasonably discriminatory. In two orders released
on December 24, 1996, and May 16, 1997, the FCC made major changes in the
interstate access charge structure. In the December 24th order, the FCC removed
restrictions on ILECs' ability to lower access prices and relaxed the regulation
of new switched access services in those markets where there are other providers
of access services. If this increased pricing flexibility is not effectively
monitored by federal regulators, it could have a material adverse effect on the
Company's ability to compete in providing interstate access services. The May
16th order substantially increased the costs that ILECs subject to the FCC's
price cap rules ("price cap LECs") recover through monthly,
non-traffic-sensitive access charges and substantially decreased the costs that
price cap LECs recover through traffic-sensitive access charges. In the May 16th
order, the FCC also announced its plan to bring interstate access rate levels
more in line with cost. The plan will include rules that are expected to be
established sometime in 1998 that may grant price cap LECs increased pricing
flexibility upon demonstrations of increased competition (or potential
competition) in relevant markets. The manner in which the FCC implements this
approach to lowering access charge levels could have a material effect on the
Company's ability to compete in providing interstate access services. Several
parties have appealed the May 16th order. Those appeals have been consolidated
and transferred to the United States Court of Appeals for the Eighth Circuit
where they are currently pending.
NEED TO ADAPT TO TECHNOLOGICAL CHANGE
The telecommunications industry is subject to rapid and significant changes
in technology, with the Company relying on third parties for the development of
and access to new technology. The effect of
23
<PAGE> 28
technological changes on the business of the Company cannot be predicted. The
Company believes its future success will depend, in part, on its ability to
anticipate or adapt to such changes and to offer, on a timely basis, services
that meet customer demands. There can be no assurance that the Company will
obtain access to new technology on a timely basis or on satisfactory terms. Any
failure by the Company to obtain new technology could have a material adverse
effect on the Company.
ACQUISITION RELATED RISKS
The Company may, as part of its business strategy, acquire other businesses
that will complement its existing business. Management is unable to predict
whether or when any prospective acquisitions will occur or the likelihood of a
material transaction being completed on favorable terms and conditions. The
Company's ability to finance acquisitions may be constrained by, among other
things, its high degree of leverage. The Indenture may significantly limit the
Company's ability to make acquisitions and to incur indebtedness in connection
with acquisitions. Such transactions commonly involve certain risks, including,
among others: the difficulty of assimilating the acquired operations and
personnel; the potential disruption of the Company's ongoing business and
diversion of resources and management time; the possible inability of management
to maintain uniform standards, controls, procedures and policies; the risks of
entering markets in which the Company has little or no direct prior experience;
and the potential impairment of relationships with employees or customers as a
result of changes in management. There can be no assurance that any acquisition
will be made, that the Company will be able to obtain additional financing
needed to finance such acquisitions and, if any acquisitions are so made, that
the acquired business will be successfully integrated into the Company's
operations or that the acquired business will perform as expected. The Company
has no definitive agreement with respect to any acquisition, although from time
to time it has discussions with other companies and assesses opportunities on an
ongoing basis.
The Company may also enter into joint venture transactions. These
transactions present many of the same risks involved in acquisitions and may
also involve the risk that other joint venture partners may have economic,
business or legal interests or objectives that are inconsistent with those of
the Company. Joint venture partners may also be unable to meet their economic or
other obligations, thereby forcing the Company to fulfill these obligations.
SHARES ELIGIBLE FOR FUTURE SALES
The Company will have 97,164.25 shares of Common Stock outstanding,
assuming the conversion of its currently outstanding 12% Cumulative Convertible
Preferred Stock, par value $.01 per share (the "Preferred Stock") and the
exercise of the Warrants, and the Company has an additional 5,000 shares of
Common Stock reserved for issuance under current and future employee stock
plans. See "Management -- Stock Plans." All of these shares of Common Stock will
be "restricted securities" as that term is defined under Rule 144 under the
Securities Act and may not be sold other than pursuant to an effective
registration statement under the Securities Act or pursuant to an exemption from
such registration requirement. The shares of Common Stock issuable upon
conversion of the Preferred Stock and the shares issuable upon exercise of the
Warrants will also be entitled to registration rights. See "Description of
Capital Stock -- Registration Rights" and "Description of the
Warrants -- Certain Terms." Following an initial public offering of the Common
Stock, sales of a substantial number of shares of Common Stock in the public
market under Rule 144 or otherwise, or the perception that such sales could
occur, could adversely affect the prevailing market price of the Common Stock.
ORIGINAL ISSUE DISCOUNT; POSSIBLE UNFAVORABLE TAX AND OTHER LEGAL CONSEQUENCES
FOR HOLDERS OF NOTES AND THE COMPANY
The Old Notes were issued at a substantial discount from their principal
amount at maturity. The New Notes are treated as a continuation of the Old Notes
for federal income tax purposes and New Notes will also be considered to have
been issued at a substantial discount. Although cash interest will not accrue on
the Notes prior to February 15, 2003, and there will be no payments of cash
interest on the Notes prior to August 15, 2003, original issue discount (the
difference between the stated redemption price at maturity and
24
<PAGE> 29
the issue price of the Notes) has accrued from the issue date of the Old Note
and will continue to accrue with respect to the New Notes from the issue date of
the Old Notes. Original issue discount will be includable as interest income
periodically (including for periods ending prior to February 15, 2003) in a U.S.
Holder's (as defined in "Certain United States Federal Tax Considerations")
gross income for United States federal income tax purposes in advance of receipt
of the cash payments to which the income is attributable.
If a bankruptcy case under the U.S. Bankruptcy Code were to be commenced by
or against the Company after the issuance of the Notes, the claim of a holder of
Notes with respect to the principal amount thereof may be limited to an amount
equal to the sum of (i) the initial offering price and (ii) that portion of the
original issue discount that is not deemed to constitute "unmatured interest"
for purposes of the U.S. Bankruptcy Code. Any original issue discount that was
not amortized as of the time of any such bankruptcy filing would constitute
"unmatured interest."
INVESTMENT COMPANY ACT CONSIDERATIONS
After giving effect to the Initial Offering and the anticipated Offerings,
the Company will have substantial cash, cash equivalents and short-term
investments. See "Capitalization" and "Use of Proceeds." Such amount may be
invested from time to time in investment securities, which may result in the
Company being treated as an "investment company" under the Investment Company
Act of 1940 (the "1940 Act"). The 1940 Act requires the registration of, and
imposes various substantive restrictions on, certain companies ("investment
companies") that are, or hold themselves out as being, engaged primarily, or
propose to engage primarily in, the business of investing, reinvesting or
trading in securities, or that fail certain statistical tests regarding
composition of assets and sources of income and are not primarily engaged in
businesses other than investing, reinvesting, owning, holding or trading
securities.
The Company believes that it is primarily engaged in a business other than
investing, reinvesting, owning, holding or trading securities and, therefore, is
not an investment company within the meaning of the 1940 Act. If the Company is
found to be an investment company, the Company currently intends to rely upon an
exemption from the 1940 Act for certain "transient" or temporary investment
companies. However, such exemption is only available to the Company until
February 1999.
If the Company were required to register as an investment company under the
1940 Act, it would become subject to substantial regulation with respect to its
capital structure, management, operations, transactions with affiliated persons
(as defined in the 1940 Act) and other matters. Application of the provisions of
the 1940 Act to the Company would have a material adverse effect on the
Company's business, financial condition and results of operations.
RISKS REGARDING FORWARD LOOKING STATEMENTS
This Prospectus contains "forward-looking statements", which generally can
be identified by the use of forward-looking terminology such as "believes",
"expects", "may", "will", "should", or "anticipates" or the negative thereof or
other variations thereon or comparable terminology, or by discussion of strategy
that involve risks and uncertainties. Management wishes to caution the reader
that these forward-looking statements, such as the Company's plans and
strategies, its anticipation of revenues from designated markets, and statements
regarding the development of the Company's businesses, the markets for the
Company's services and products, the Company's anticipated capital expenditures,
possible changes in regulatory requirements and other statements contained
herein regarding matters that are not historical facts, are only predictions and
estimates regarding future events and circumstances. Cautionary statements are
disclosed in this Prospectus, including, without limitation, in connection with
the forward-looking statements included herein and under "Risk Factors." No
assurance can be given that the future results will be achieved; actual events
or results may differ materially as a result of risks facing the Company. Such
risks include, but are not limited to, the Company's ability to successfully
market its services to current and new customers, interconnect with ILECs,
develop efficient OSS and other back office systems, provision new customers,
access markets, identify, finance and complete suitable acquisitions, install
facilities, including switching electronics, and obtain leased trunking
capacity, rights-of-way, building access rights and any required
25
<PAGE> 30
governmental authorizations, franchises and permits, all in a timely manner, at
reasonable costs and on satisfactory terms and conditions, as well as
regulatory, legislative and judicial developments that could cause actual
results to differ materially from the future results indicated, expressed or
implied, in such forward-looking statements. All subsequent written and oral
forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by such cautionary statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of their dates. The Company undertakes no
obligations to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.
USE OF PROCEEDS
The net proceeds received by the Company from the Initial Offering were
approximately $240.7 million, after deducting estimated underwriting discounts
and commissions and other expenses payable by the Company.
The Company intends to use the net proceeds from the Initial Offering,
together with the remaining proceeds from the Equity Commitments, to fund the
costs of deploying networks in all 12 Phase I markets and the operation of those
networks to Positive Free Cash Flow, including the costs to develop, acquire and
integrate the necessary OSS and other back office systems. The Company's
principal capital expenditure requirements include the purchase and installation
of digital switches, transmission equipment collocated in ILEC central offices,
customer premise equipment, and the overbuilding of leased transmission
facilities as traffic volume growth makes it economically attractive.
As part of its strategy, the Company may make acquisitions and enter into
joint ventures, and a portion of the net proceeds from the Initial Offering may
be used for such purposes. The Company has no definitive agreement with respect
to any acquisition or joint venture, although from time to time it has
discussions with other companies and assesses opportunities on an ongoing basis.
The Company may require additional financing to complete its Phase I and Phase
II market buildout (or require financing sooner than anticipated) if: (i) the
Company's development plans or projections change or prove to be inaccurate;
(ii) the Company engages in any acquisitions; or (iii) the Company alters the
schedule or targets of its roll-out plan. There can be no assurance that such
additional financing will be available on terms acceptable to the Company or at
all. See "Prospectus Summary -- Financing Plan," "Risk Factors -- Significant
Capital Requirements; Uncertainty of Additional Financing" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
The Exchange Offer is intended to satisfy certain of the Company's
obligations under the Notes Registration Rights Agreement. The Company will not
receive any cash proceeds from the issuance of the New Notes offered hereby. In
consideration for issuing the New Notes contemplated in this Prospectus, the
Company will receive Old Notes in like principal amount, the form and terms of
which are the same as the form and terms of the New Notes (which replace the Old
Notes), except as described herein.
DIVIDEND POLICY
The Company has not paid any dividends since its inception and does not
anticipate declaring or paying cash dividends in the foreseeable future, as it
intends to retain future earnings, if any, for reinvestment in its business and
repayment of indebtedness. Any determination to declare or pay cash dividends
will be at the discretion of the Company's Board of Directors, will be subject
to compliance with the Company's debt financing arrangements and will depend on
the Company's financial condition, results of operations, capital requirements
and such other factors as the Company's Board of Directors considers relevant.
Certain covenants in the Indenture will prohibit or limit the ability of the
Company and its subsidiaries to declare or pay cash dividends. See "Description
of the Notes."
26
<PAGE> 31
CAPITALIZATION
The following table sets forth the cash and capitalization of the Company
as of March 31, 1998. The Old Notes surrendered in exchange for the New Notes
will be retired and canceled and cannot be reissued. Accordingly, issuance of
the New Notes will not result in any increase or decrease in the indebtedness of
the Company. As such, no effect has been given to the Exchange Offer in this
capitalization table. This table should be read in conjunction with "Selected
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," and the consolidated financial statements, including
the notes thereto, and other financial data contained elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
----------------------
ACTUAL
----------------------
(AUDITED)
<S> <C>
Cash, cash equivalents, and short-term investments.......... $257,594,702
============
Long-term debt:
Old Notes, at accreted value(1)........................... $247,329,420
------------
Total long-term debt................................. 247,329,420
------------
Redeemable convertible preferred stock(2):
Redeemable convertible preferred stock, $.01 par value,
96,000 shares authorized, 95,641.25 shares issued and
outstanding............................................ 52,350,623
Preferred stock subscriptions receivable.................. (275,000)
------------
Total redeemable convertible preferred stock...... 52,075,623
------------
Redeemable warrants(1)...................................... 8,183,550
Stockholders' deficit:
Common stock, $.01 par value, 102,524 shares authorized, 1
share issued and outstanding(2)........................ --
Additional paid-in capital................................ 100
Accumulated deficit....................................... (13,043,639)
------------
Total stockholders' deficit.......................... (13,043,539)
------------
Total capitalization.............................. $294,545,054
============
</TABLE>
- ---------------
(1) Of the $250,477,150 gross proceeds from the issuance of the Units,
$242,293,600 was allocated to the initial accreted value of the Old Notes,
and $8,183,550 was allocated to the Warrants. The Warrants may be required
to be redeemed by the Company for cash upon the occurrence of a Repurchase
Event, as defined in the provisions of the Warrant Agreement.
(2) If a Liquidity Event has not occurred by August 13, 2004, the Company may be
required, subject to the covenants in the Indenture, to repurchase the Fund
Investors' and Management Investors' preferred and common stock at the
higher of fair market value and original cost plus accrued dividends at 12%
per annum, provided that any claim for payment will be subordinated in right
of payment to the Notes. Twenty-three days after the issuance of a
Repurchase Notice (as defined in the LLC Agreement), the security holders
may have the fair value of their securities determined. Fair market value is
defined as the amount agreed to be the fair market value by the LLC, the
majority of the Fund Investors, and the majority of the Management
Investors. If mutual agreement cannot be reached, fair market value for (a)
publicly traded securities generally means the average of the closing prices
of such securities for the 21 day period after the filing of the Repurchase
Notice and (b) non-publicly traded securities, a valuation determined by an
appraisal mechanism. See "Certain Relationships and Related Transactions."
27
<PAGE> 32
SELECTED FINANCIAL DATA
The selected consolidated financial data presented below as of and for the
three months ended March 31, 1998 and as of and for the period from inception
(April 22, 1997) to December 31, 1997 were derived from the audited consolidated
financial statements of the Company and the notes thereto contained elsewhere in
this Prospectus, which statements have been audited by Arthur Andersen LLP,
independent public accountants. The selected pro forma consolidated financial
data set forth below is unaudited and gives effect to the issuance of the Notes
as if the issuance of the Notes and the $19.7 million of Equity Contributions
had occurred on January 1, 1998 and April 22, 1997, respectively. Operating
results for the three months ended March 31, 1998 are not necessarily indicative
of the results that may be expected for the entire year.
From the Company's formation in April 1997 until December 16, 1997, the
Company was in the development stage. The Company has generated operating losses
and negative cash flow from its limited operating activities to date. As a
result of the Company's limited operating history, prospective investors have
limited operating and financial data about the Company upon which to base an
evaluation of the Company's performance and an investment in the Notes. The
selected financial data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements, including the notes
thereto, contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
ACTUAL PRO FORMA(1)
-------------------------------------- --------------------------------------
PERIOD FROM INCEPTION PERIOD FROM INCEPTION
THREE MONTHS (APRIL 22, 1997) THREE MONTHS (APRIL 22, 1997)
ENDED THROUGH ENDED THROUGH
MARCH 31, 1998 DECEMBER 31, 1997 MARCH 31, 1998 DECEMBER 31, 1997
-------------- --------------------- -------------- ---------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................. $ 202,925 $ 403 $ 202,925 $ 403
Operating expenses:
Technical.............................. 234,831 151,269 234,831 151,269
Selling, general and administrative.... 4,701,090 3,425,912 4,701,090 3,425,912
Depreciation and amortization.......... 208,424 12,639 208,424 12,639
------------ ------------ ------------ ------------
Total operating expenses............. 5,144,345 3,589,820 5,144,345 3,589,820
------------ ------------ ------------ ------------
Loss from operations..................... (4,941,420) (3,589,417) (4,941,420) (3,589,417)
Interest income.......................... 2,194,226 111,417 2,194,226 111,417
Interest expense......................... (4,669,079) -- (7,689,781) (22,545,119)
------------ ------------ ------------ ------------
Net loss................................. $ (7,416,273) $ (3,478,000) $(10,436,975) $(26,023,119)
Redeemable preferred stock dividends..... (1,289,366) (860,000) (1,471,382) (2,574,117)
------------ ------------ ------------ ------------
Net loss applicable to common stock...... $ (8,705,639) $ (4,338,000) $(11,908,357) $(28,597,236)
============ ============ ============ ============
Net loss per share....................... $ (8,705,639) $ (4,338,000) $(11,908,357) $(28,597,236)
============ ============ ============ ============
OTHER FINANCIAL DATA:
EBITDA(2)................................ $ (4,732,996) $ (3,576,778) $ (4,732,996) $ (3,576,778)
Net cash used in operating activities.... (2,195,564) (1,942,897) (2,195,564) (1,942,897)
Net cash used in investing activities.... (43,525,476) (21,926,058) (43,525,476) (21,926,058)
Net cash provided by financing
activities............................. 261,672,797 29,595,314 261,041,493 289,990,664
Capital expenditures..................... 8,510,255 23,912,659 8,510,255 23,912,659
Ratio of earnings to fixed charges(3).... -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997 MARCH 31, 1998 DECEMBER 31, 1997
-------------- ----------------- -------------- -----------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA (AT END OF PERIOD):
Cash, cash equivalents and short-term
investments............................ $257,594,702 $ 5,726,359 $256,963,398 $266,121,709
Property and equipment, net.............. 32,669,385 23,900,020 32,669,385 23,900,020
Total assets............................. 300,227,692 30,047,014 300,160,342 299,744,352
Long-term debt........................... 247,329,420 -- 250,282,772 264,374,007
Redeemable convertible preferred stock,
net(4)................................. 52,075,623 30,455,214 52,257,639 51,854,231
Stockholders' deficit.................... (13,043,539) (4,337,900) (16,246,257) (28,597,136)
</TABLE>
- ---------------
(1) The pro forma financial data as of and for the three months ended March 31,
1998 and as of and for the period from inception (April 22, 1997) to
December 31, 1997 gives effect to the issuance of the Notes as if the
issuance of the Notes and the $19.7 million of Equity Contributions had
occurred on January 1, 1998 and April 22, 1997, respectively.
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(2) EBITDA represents earnings before interest, income taxes, depreciation and
amortization. EBITDA is not a measurement of financial performance under
generally accepted accounting principles, is not intended to represent cash
flow from operations, and should not be considered as an alternative to net
loss as an indicator of the Company's operating performance or to cash flows
as a measure of liquidity. The Company believes that EBITDA is widely used
by analysts, investors and other interested parties in the
telecommunications industry. EBITDA is not necessarily comparable with
similarly titled measures for other companies.
(3) For purposes of calculating the ratio of earnings to fixed charges, earnings
is defined as net loss plus fixed charges (other than capitalized interest).
Fixed charges consist of interest and amortization of debt discount and debt
issuance costs, whether expensed or capitalized, and that portion of rental
expense deemed to represent interest (estimated to be 1/3 of such expense).
The Company's earnings for the three months ended March 31, 1998, and for
the period from inception (April 22, 1997) through December 31, 1997, were
insufficient to cover fixed charges by approximately $7.9 million and $3.5
million, respectively. After giving pro forma effect to the increase in
interest expense resulting from the Initial Offering, the Company's earnings
would have been insufficient to cover fixed charges by approximately $10.9
million and $26.0 million, for the three months ended March 31, 1998 and for
the period from inception (April 22, 1997) through December 31, 1997,
respectively.
(4) If a Liquidity Event has not occurred by August 13, 2004, the Company may be
required, subject to the covenants in the Indenture, to repurchase the Fund
Investors' and Management Investors' preferred stock at the higher of fair
market value and original cost plus accrued dividends at 12% per annum,
provided that any claim for payment will be subordinated in right of payment
to the Notes. Twenty-three days after the issuance of a Repurchase Notice
(as defined in the LLC Agreement), the security holders may have the fair
value of their securities determined. Fair market value is defined as the
amount agreed to be the fair market value by the LLC, the majority of the
Fund Investors, and the majority of the Management Investors. If mutual
agreement cannot be reached, fair market value for (a) publicly traded
securities generally means the average of the closing prices of such
securities for the 21 day period after the filing of the Repurchase Notice
and (b) non-publicly traded securities, a valuation determined by an
appraisal mechanism. See "Certain Relationships and Related Transactions."
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the consolidated
financial statements and the notes thereto contained elsewhere in this
Prospectus. Certain information contained in the discussion and analysis set
forth below and elsewhere in this Prospectus, including information with respect
to the Company's plans and strategy for its business and related financing,
includes forward-looking statements that involve risk and uncertainties. See
"Risk Factors" for a discussion of important factors that could cause actual
results to differ materially from the results described in or implied by the
forward-looking statements contained herein.
OVERVIEW
Allegiance seeks to be a premier provider of telecommunications services to
business, government and other institutional users in major metropolitan areas
across the United States. As a CLEC, Allegiance anticipates offering an
integrated set of telecommunications products and services including local
exchange, local access, domestic and international long distance, enhanced
voice, data and a full suite of Internet services. The Company was founded in
April 1997 by a management team led by Royce J. Holland, the former president,
chief operating officer and co-founder of MFS, and Thomas M. Lord, former
managing director of Bear, Stearns & Co. Inc., where he specialized in the
telecommunications, information services and technology industries. The
Company's initial equity financing of approximately $50.1 million has been
provided by the Management Investors and the Fund Investors.
The Company has generated only nominal revenues to date. Since its
inception on April 22, 1997, the Company's principal activities have included
developing its business plans, procuring governmental authorizations, raising
capital, hiring management and other key personnel, working on the design and
development of its local exchange telephone networks and OSS, acquiring
equipment and facilities and negotiating interconnection agreements. The Company
does not expect to achieve positive EBITDA in any market until at least two to
three years after it commences initial service in such market. As a result of
its development activities, the Company has experienced significant operating
losses and negative EBITDA to date. Allegiance is currently operational in three
Phase I markets: New York City, Dallas and Atlanta; and is in the process of
deploying networks in five additional Phase I markets: Chicago, Los Angeles, San
Francisco, Boston and Fort Worth. The Company expects to continue to experience
increasing operating losses and negative EBITDA as it expands its operations.
See "Risk Factors -- Limited History of Operations; Historical and Anticipated
Future Negative EBITDA and Operating Losses."
As a result of the Company's limited operating history, prospective
investors have limited operating and financial data about the Company upon which
to base an evaluation of the Company's performance and an investment in the
Notes.
FACTORS AFFECTING FUTURE OPERATIONS
Revenues
Allegiance expects to generate most of its revenues from sales to end user
customers in the business, government, and other institution market segments,
but may augment this core revenue source by selectively supplying wholesale
services including equipment collocation and facilities management services to
ISPs. Allegiance plans to deploy its sales teams in areas where the Company can
serve customers through a direct connection using unbundled loops or high
capacity circuits connected to Allegiance's facilities collocated in ILEC
central offices. The Company currently plans to resell ILEC services only in
order to provide comprehensive geographical service coverage to customers with
multiple on-net sites (which can be addressed by the Company's facilities-based
services) and a few off-net sites (which can be addressed only by the Company's
reselling ILEC services). Allegiance believes that it will be able to generate
significantly higher gross margins by providing local exchange, local access and
long distance services using its own facilities than could be obtained by
reselling such services.
Allegiance will seek to price its services competitively in relation to
that of the ILECs and may offer combined service discounts designed to give
customers incentives to buy a portfolio of services through the
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Company. Although pricing will be an important part of the Company's strategy,
management believes that, especially for small to medium-sized business
customers, customer relationships, customer care, "one stop shopping" and
consistent quality will be the key to generating customer loyalty. During the
past several years, market prices for many telecommunications services have been
declining, which is a trend that the Company believes will likely continue. This
decline will have a negative effect on the Company's gross margin that may not
be offset completely by savings from decreases in the Company's cost of
services.
Current industry statistics demonstrate that there is significant churn of
customers within the industry, and the Company believes that the churn is
especially high when customers are only buying long distance services from a
carrier or when customers are buying resold services. Allegiance believes that
by offering LAN interconnection, frame relay, Internet services, ISDN, DSL and
other enhanced services not generally available from the ILECs (or available
only at high prices) in conjunction with traditional local and long distance
services and providing superior customer care, it will be in a position to
minimize customer churn.
Operating Expenses
The Company expects that its primary operating expenses will consist of
cost of services and selling, general and administrative expenses.
Cost of Services. Under its "smart build" strategy, Allegiance plans to
deploy digital switching platforms with local and long distance capability and
initially lease fiber trunking capacity from the ILECs and other CLECs to
connect the Company's switch with its transmission equipment collocated in ILEC
central offices. Allegiance will lease unbundled copper loop lines and high
capacity digital lines from the ILECs to connect the Company's customers and
other carriers' networks to the Company's network. Allegiance plans to lease
capacity or overbuild specific network segments as economically justified by
traffic volume growth. In addition, Allegiance expects to increase the capacity
of its switches, and may add additional switches, in a market as demand
warrants.
In October 1997, the Company entered into a five-year general agreement
with Lucent establishing terms and conditions for the purchase of Lucent
products, services and licensed materials. The agreement includes a three-year
exclusivity commitment for the purchase of products and services related to new
switches. The agreement contains no minimum purchase requirements.
The Company expects switch site lease costs will be a significant part of
the Company's ongoing cost of services. The costs to lease unbundled copper loop
lines and high capacity digital lines from the ILECs will vary by ILEC and are
regulated by state authorities pursuant to the Telecommunications Act. The
Company believes that in most of the markets it plans to enter there are
multiple carriers in addition to the ILEC from which it could lease trunking
capacity. The Company expects that the costs associated with these leases will
increase with customer volume and will be a significant part of the Company's
ongoing cost of services.
Collocation costs are also expected to be a significant part of the
Company's network development and ongoing cost of services. Under the
Telecommunications Act, carriers like the Company must be allowed to place their
equipment within the central offices of the ILEC for the purposes of
interconnecting its network with that of the ILEC ("collocation"). For example,
Allegiance will use collocation to access the ILECs unbundled networks elements.
This collocation can be a physical space or cage within the ILEC central office
where the Company would place its equipment. In some cases, virtual collocation
would be used where the ILEC places equipment within the central office and
would maintain the equipment on behalf of the Company. In this virtual
collocation scenario, the Company would not have physical access to the ILEC's
central office. For use of their central offices for collocation, ILECs
typically charge both a start-up fee as well as a monthly recurring fee. The
Company will be required to invest a significant amount of funds to develop the
central office collocation sites and to deploy the transmission and distribution
electronics.
In order to enter a market, Allegiance must enter into an interconnection
agreement with the ILEC to make ubiquitous calling available to its customers.
Typically these agreements set the cost per minute to be charged by each party
for the calls which have traversed between each carrier's network. These costs
will grow in proportion to the Company's customers outbound call volume and are
expected to be a major portion of the Company's cost of services. However, the
Company does expect to generate increased revenue from the ILECs as the
Company's customers inbound calling volume increases. To the extent the
Company's
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customers' outbound call volume is equivalent to their inbound call volume, the
Company expects that its interconnection costs paid to the ILECs will be
substantially offset by the interconnection revenues received from the ILECs.
The Company has entered into one resale agreement with a long distance
carrier to provide the Company with transmission services and expects to enter
into resale agreements with other carriers in the future. Such agreements
typically provide for the resale of long distance services on a per-minute basis
and may contain minimum volume commitments; however, the existing resale
agreement does not contain any minimum volume commitments. In the event the
Company fails to meet its minimum volume commitments, it may be obligated to pay
underutilization charges and in the event it underestimates its need for
transmission capacity, the Company may be required to obtain capacity through
more expensive means. These costs will increase as the Company's customers' long
distance calling volume increases, and the Company expects that these costs will
be a significant portion of its cost of long distance services. As traffic on
specific routes increases, the Company may lease long distance trunk capacity.
Selling, General and Administrative Expenses. The Company's selling,
general and administrative expenses will include its infrastructure costs,
including selling and marketing costs, customer care, billing, corporate
administration, personnel and network maintenance.
The Company plans to employ a large direct sales force in each market and
to build a national sales force as the Company grows. To attract and retain a
highly qualified sales force, the Company plans to offer its sales and customer
care personnel a compensation package emphasizing commissions and stock options.
The Company expects to incur significant selling and marketing costs as it
continues to expand its operations. In addition, Allegiance plans to offer sales
promotions to win customers, especially in the first few years as its
establishes its market presence.
Allegiance is currently developing tailored systems and procedures for OSS
and other back office systems that are required to enter, schedule, provision,
track a customer order from point of sale to the installation and testing of
service and that will include or interface with trouble management, inventory,
billing, collection and customer care service systems. Along with the
development cost of the systems, the Company will also incur ongoing expenses
for customer care and billing. As the Company's strategy stresses the importance
of personalized customer care, the Company expects that its customer care
department will become a larger part of the Company's ongoing administrative
expenses. The Company also expects billing costs to increase as its number of
customers, and the call volume, increases. Billing is expected to be a
significant part of the Company's ongoing administrative expenses.
Allegiance will incur other costs and expenses, including the costs
associated with the maintenance of its network, administrative overhead, office
leases and bad debt. The Company expects that these costs will grow
significantly as its expands its operations and that administrative overhead
will be a large portion of these expenses during the start-up phase of the
Company's business. However, the Company expects these expenses to become
smaller as a percentage of the Company's revenue as the Company builds its
customer base.
RESULTS OF OPERATIONS
From its inception on April 22, 1997 through December 16, 1997, the Company
was in the development stage of operations. Its principle activities during that
period included developing its business plans, raising capital, hiring
management and other key personnel, working on the design and development of its
local exchange telephone networks and OSS and negotiating interconnection
agreements. From April 22, 1997 through December 31, 1997, the Company's
operations resulted in a $4.3 million net loss (after accrued redeemable
preferred stock dividends). As of December 31, 1997, the Company generated only
nominal revenues.
For the three months ended March 31, 1998, the Company generated revenues
of $.2 million from local and long distance services provided to customers in
the Dallas market. The Company incurred approximately $.5 million in delivering
service and preparing its local exchange facilities in Dallas, New York City and
Atlanta to become operational. For the three months ended March 31, 1998, the
Company also incurred $4.7 million for selling and general and administrative
expenses, primarily resulting from $3.6 million of payroll, employee benefits,
travel, legal and consulting fees relating to the commencement of business in
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several Phase I markets. The Company also incurred $.5 million for office space
and related operating costs. Interest expense during the three months ended
March 31, 1998 was $4.7 million, reflecting the issuance of the Old Notes during
February 1998. Interest income during such period was $2.2 million resulting
from the investment of the net proceeds from the Equity Contributions and the
Initial Offering.
LIQUIDITY AND CAPITAL RESOURCES
Allegiance plans to establish networks in 24 Tier I U.S. markets. The
Company plans to deploy its networks principally in two phases of development,
each to contain 12 major U.S. metropolitan markets.
The development of the Company's business and deployment and start-up of
its networks in these markets and the establishment of reliable OSS will require
significant capital to fund capital expenditures, working capital, debt service
and cash flow deficits. The Company's principal capital expenditure requirements
include the purchase and installation of digital switches, transmission
equipment collocated in ILEC central offices, and customer premise equipment,
the development of efficient OSS and other automated back office systems, and
the overbuilding of leased transmission facilities as traffic volume growth
makes it economically attractive. Additional capital will be required for office
space, switch site, and collocation space buildout at ILEC central offices,
corporate overhead and personnel and the development, acquisition and
integration of the Company's back office systems. Future overbuilds of leased
transmissions facilities and potential strategic acquisitions may increase
capital requirements, although cash requirements may be reduced if network
expansions are accomplished over a longer time frame or market penetration rates
are less than expected.
Allegiance's financing plan is predicated on the pre-funding of each
market's expansion to Positive Free Cash Flow (operating cash flow from a market
sufficient to fund such market's operating costs and capital expenditures). This
approach is designed to allow the Company to be opportunistic and raise capital
on more favorable terms and conditions.
To pre-fund each Phase I market's expansion, the Company raised
approximately $50.1 million from the Equity Contributions and received
approximately $240.7 million of net proceeds, after deducting estimated
underwriting discounts and commissions and other expenses payable by the
Company, from the Initial Offering. Allegiance is currently operational in three
Phase I markets: New York City, Dallas and Atlanta; and is in the process of
deploying networks in five additional Phase I markets: Chicago, Los Angeles, San
Francisco, Boston and Fort Worth. As part of this effort, in October 1997, the
Company acquired two Lucent Series 5ESS(R)-2000 digital switches in New York
City and Atlanta and certain furniture and fixtures in Dallas from US ONE
Communications, Inc. for an aggregate purchase price of $19.3 million. The
Company has also purchased from Lucent, switches for the Dallas, Chicago, Los
Angeles, San Francisco and Boston markets. The cost of these switches and
related equipment and installation will be approximately $37.1 million.
Since completion of the Initial Offering, the Company has increased the
scope of its business plan to accommodate (i) an expansion of the Company's
network buildout in certain Phase I markets to include additional central
offices, thereby giving the Company access to a larger number of potential
customers in those markets, (ii) an accelerated and expanded deployment of data,
Internet and enhanced services in the Company's markets and (iii) the
acceleration of network deployment in Phase II markets. The Company estimates
that its cumulative cash requirements to fund its modified business plan,
including prefunding each Phase I and Phase II market's expansion to Positive
Free Cash Flow, will be between $650 million and $700 million.
Although the Company would have the right to redeem up to 35% of the
principal amount at maturity of the Notes with the proceeds of the Equity
Offering under certain circumstances, the Company intends to use such proceeds
to fund its business plan. The Company believes, based on its modified business
plan, that the net proceeds from the Initial Offering and the Equity
Contributions, together with the anticipated proceeds from the Offerings, will
be sufficient to pre-fund its Phase I and Phase II market deployment to Positive
Free Cash Flow. There can be no assurance, however, that the Company will
consummate either the Equity Offering or the Debt Offering or that it will raise
sufficient funds in such Offerings to fund such deployment to Positive Free Cash
Flow. In such event, the Company would delay deployment of networks in all or
certain of the Phase II markets and may have to defer the expansion of its
network buildout in its Phase I markets and the expansion of deployment of data,
Internet and enhanced services.
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The actual amount and timing of the Company's future capital requirements
may differ materially from the Company's estimates as a result of, among other
things, the demand for the Company's services and regulatory, technological and
competitive developments (including additional market developments and new
opportunities) in the Company's industry. The Company also expects that it will
require additional financing (or require financing sooner than anticipated) if:
(i) the Company's development plans or projections change or prove to be
inaccurate; (ii) the Company engages in any acquisitions; or (iii) the Company
alters the schedule or targets of its roll-out plan or, in the event the Equity
Offering, the Debt Offering, or both, are not consummated, the Company
accelerates the implementation of its network deployment in its Phase II
markets. Sources of additional financing may include commercial bank borrowings,
vendor financing or the private or public sale of equity or debt securities.
There can be no assurance that such financing will be available on terms
acceptable to the Company or at all. See "Risk Factors -- Significant Capital
Requirements; Uncertainty of Additional Financing."
The Equity Commitments consist of commitments aggregating $95 million from
the Fund Investors and $5 million from the Management Investors. Drawdowns of
these Equity Commitments are contingent upon certain conditions, including the
approval of individual market business plans and operating budgets by the Fund
Investors and the Allegiance Board of Directors. See "Certain Relationships and
Related Transactions." The Company's initial equity financing of approximately
$50.1 million has been provided to fund the Company's start-up costs and ongoing
network development in the Dallas, New York City and Atlanta markets. If a
Liquidity Event has not occurred by August 13, 2004, the Company may be
required, subject to the covenants in the Indenture, to repurchase the Fund
Investors' and Management Investors' preferred and common stock at the higher of
fair market value and original cost plus accrued dividends at 12% per annum,
provided that any claim for payment will be subordinated in right of payment to
the Notes.
The Company is in discussions with AT&T Capital Corporation ("AT&T
Capital") regarding obtaining up to an aggregate of $100.0 million of lease
financing (the "Lease Facility") for the acquisition of digital switches,
software, electronics and associated transmission equipment by certain of the
Company's subsidiaries. It is currently anticipated that the Lease Facility
would have a term of approximately one year and would allow the Company's
subsidiaries to finance the purchase of such equipment (plus an additional
amount of up to 15% of such equipment costs) on an as needed basis. As currently
proposed, each lease entered into under the Lease Facility would have a term of
seven and one-half years, with payments to be made on a quarterly basis. The
interest rate for the Lease Facility has not been determined. Each lease would
be secured by the equipment acquired and thus the Notes would be effectively
subordinated to amounts outstanding under the Lease Facility. In addition, the
Company could be required to guarantee all amounts outstanding under the Lease
Facility. It is currently expected that upon consummation of the Lease Facility,
the Company would be required to pay a commitment fee no greater than 1.5% of
the aggregate amount available and that the Company would be required to pay
non-utilization fees no greater than .25% of any unused funds upon both the
six-month anniversary and the expiration date of the Lease Facility.
If the Company elects to pursue implementation of the Lease Facility, such
implementation will be subject to the satisfaction of a number of conditions,
including the completion of the negotiation of such definitive terms and
conditions, completion of due diligence and receipt of AT&T Capital internal
approvals.
Because the Company's cost of rolling out its networks and operating its
business, as well as the Company's revenues, will depend on a variety of factors
(including the ability of the Company to meet its roll-out schedules, negotiate
favorable prices for purchases of equipment, and develop, acquire and integrate
the necessary OSS and other back office systems, as well as the number of
customers and the services for which they subscribe, the nature and penetration
of new services that may be offered by the Company, regulatory changes and
changes in technology), actual costs and revenues will vary from expected
amounts, possibly to a material degree, and such variations are likely to affect
the Company's future capital requirements. Accordingly, there can be no
assurance that the Company's actual capital requirements will not exceed the
anticipated amounts described above. Further, the exact amount of the Company's
future capital requirements will depend upon many factors, including the cost of
the development of its networks in each of its markets, the extent of
competition and pricing of telecommunications services in its markets, and the
acceptance of the Company's services. Also, the Company expects that the
expansion into additional markets will require
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additional financing, which may include commercial bank borrowing, vendor
financing, or the public or private sale of equity or debt securities. There can
be no assurance that the Company will be successful in raising sufficient
additional capital at all or on terms acceptable to the Company. See "Risk
Factors -- Significant Capital Requirements; Uncertainty of Additional
Financing."
EFFECT OF THE EQUITY OFFERING
The Fund Investors and the Management Investors currently own 95.0% and
5.0%, respectively, of the ownership interests of Allegiance LLC, an entity that
owns substantially all of the Company's outstanding capital stock. Upon
consummation of the Equity Offering, Allegiance LLC will dissolve and its assets
(which consist almost entirely of such capital stock) will be distributed to the
Fund Investors and the Management Investors in accordance with a final
allocation calculated immediately prior to such distribution (the "Equity
Allocation") pursuant to the LLC Agreement (as defined herein). The LLC
Agreement provides that the Equity Allocation between the Fund Investors and the
Management Investors will range between 95.0%/5.0% and 66.7%/33.3% based on the
valuation of the Company's Common Stock implied by the Equity Offering. Based
upon the current valuation of the Company's Common Stock implied by the Equity
Offering, the Equity Allocation will be 66.7% to the Fund Investors and 33.3% to
the Management Investors. Under generally accepted accounting principles, at the
date of the consummation of the Equity Offering, the Company will be required to
record the increase in the assets of Allegiance LLC allocated to the Management
Investors as an increase in additional paid-in capital and a non-cash,
non-recurring charge to operating expense (based on the valuation of the Common
Stock implied by the Equity Offering). A portion of the charge will be
recognized upon consummation of the Equity Offering and the remainder will be
recognized ratably in 1998, 1999 and 2000, assuming the Equity Offering is
consummated in 1998.
YEAR 2000
The Company has reviewed its computer systems to identify those areas that
could be affected by the "Year 2000" issue. The Company believes that its
systems are Year 2000 compliant. In addition, the Company believes that many of
its customers and suppliers, particularly the ILECs and long distance carriers,
are also impacted by the Year 2000 issue, which in turn could affect the
Company. The Company is assessing the compliance efforts of its major customers
and suppliers. If the systems of certain of the Company's customers and
suppliers, particularly the ILECs, long distance carriers and others on whose
services the Company depends or with whom the Company's systems interface, are
not Year 2000 compliant, it would have a material adverse effect on the Company.
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BUSINESS
THE COMPANY
Allegiance seeks to be a premier provider of telecommunications services to
business, government and other institutional users in major metropolitan areas
across the United States. As a CLEC, Allegiance anticipates offering an
integrated set of telecommunications products and services including local
exchange, local access, domestic and international long distance, enhanced
voice, data and a full suite of Internet services. The Company was founded in
April 1997 by a management team led by Royce J. Holland, the former president,
chief operating officer and co-founder of MFS, and Thomas M. Lord, former
managing director of Bear, Stearns & Co. Inc., where he specialized in the
telecommunications, information services and technology industries. The
Company's initial equity financing of approximately $50.1 million has been
provided by the Management Investors and the Fund Investors.
The Company believes that the Telecommunications Act, by opening the local
exchange market to competition, has created an attractive opportunity for new
facilities-based CLECs like the Company. Most importantly, the
Telecommunications Act established a framework for CLECs to acquire the UNEs
from the ILECs that are necessary for the cost-effective provision of service.
As such, the Telecommunications Act will enable the Company to deploy digital
switching platforms with local and long distance capability and initially lease
fiber trunking capacity from the ILECs and other CLECs to connect the Company's
switch with its transmission equipment collocated in ILEC central offices.
Thereafter, the Company plans to lease capacity or overbuild specific network
segments as economically justified by traffic volume growth. Management believes
that pursuing this "smart build" approach should: (i) accelerate market entry by
9 to 18 months by deferring the need for city franchises, rights-of-way and
building access; (ii) reduce initial capital requirements for individual market
entry prior to revenue generation, allowing the Company to focus its capital
resources on the critical areas of sales, marketing, and OSS; (iii) provide for
ongoing capital expenditures on a "success basis" as demand dictates; and (iv)
allow the Company to address attractive service areas selectively throughout its
targeted markets.
Allegiance is currently developing tailored systems and procedures for OSS
and other back office systems that it believes will provide the Company with a
significant competitive advantage in terms of cost, processing large order
volumes and customer service. These systems are required to enter, schedule,
provision and track a customer's order from the point of sale to the
installation and testing of service and also include or interface with trouble
management, inventory, billing, collection and customer service systems. The
legacy systems currently employed by most ILECs, CLECs and long distance
carriers, which were developed prior to the passage of the Telecommunications
Act, generally require multiple entries of customer information to accomplish
order management, provisioning, switch administration and billing. This process
is not only labor intensive, but it also creates numerous opportunities for
errors in provisioning service and billing, delays in installing orders, service
interruptions, poor customer service, increased customer churn and significant
added expenses due to duplicated efforts and the need to correct service and
billing problems. The Company believes that the practical problems and costs of
upgrading legacy systems are often prohibitive for companies whose existing
systems support a large number of customers with ongoing service.
Allegiance plans to deploy networks in 24 Tier I markets. The Company
estimates that these 24 markets will include 18 BTAs with more than 20 million
non-residential access lines, representing approximately 44.7% of the total
non-residential access lines in the U.S. With a network deployment and end user,
direct sales marketing strategy focusing on the central business districts and
suburban commercial districts in these areas, Allegiance plans to address a
majority of the non-residential access lines in most of its targeted markets.
The Company plans to deploy its networks principally in two phases of
development. Phase I is to offer services in 12 of the largest metropolitan
areas in the U.S., which the Company believes include approximately 26.0% of the
nation's total non-residential access lines. Allegiance is currently operational
in three Phase I markets: New York City, Dallas and Atlanta; and is in the
process of deploying networks in five additional Phase I markets: Chicago, Los
Angeles, San Francisco, Boston and Fort Worth. In each of these markets, the
Company will use a Lucent Series 5ESS(R)-2000 digital switch, which provides
local and long distance functionality. Pending securing additional financing,
the Company intends to begin network development in its
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<PAGE> 41
Phase II markets. These additional 12 markets are estimated to encompass
approximately 18.7% of the total non-residential access lines in the U.S.
Management expects to commence network deployment in these cities in 1999, with
services anticipated to begin during 1999 and 2000.
As of April 30, 1998, the Company has made sales of 8,434 lines to 534
customers, of which, 5,757 lines for 329 customers were in service as of such
date.
BUSINESS STRATEGY
To accomplish its goal of becoming a premier provider of telecommunications
services to business, government, and other institutional users in U.S.
metropolitan areas, the Company has developed an end-user-focused business
strategy designed to achieve significant market penetration and deliver superior
customer care while maximizing operating margins. The key components of this
strategy include the following:
Leverage Proven Management Team. The Company's veteran management team has
extensive experience and past successes in the CLEC industry, and the Company
believes that its ability to combine and draw upon the collective talent and
expertise of its senior management gives it a competitive advantage in the
effective and efficient execution of network deployment, sales, provisioning,
service installation, billing and collection, and customer service functions.
Allegiance's Chairman and Chief Executive Officer, Royce J. Holland, has more
than 25 years of experience in the telecommunications and energy industries,
including as president, chief operating officer, and co-founder of MFS. Under
his leadership, MFS grew from a start-up operation to become the largest CLEC
with approximately $1.1 billion in revenues before its acquisition by WorldCom
in 1996. Other key Allegiance executives have significant experience in the
critical functions of network operations, sales and marketing, back office and
OSS, finance and regulatory affairs.
Target End Users with Integrated Service Offerings. Allegiance plans to
focus principally on end user customers in the business, government and other
institutional market segments. The majority of these customers are expected to
be small and medium-sized businesses, to which the Company will offer "one-stop
shopping" consisting of a comprehensive package of communications services with
convenient integrated billing and a single point of contact for sales and
service. For large businesses and government and other institutional users,
which typically obtain telecommunications services from a variety of suppliers,
the Company will focus primarily on capturing a significant portion of these
customers' local exchange, intraLATA toll and data traffic. Although the Company
will principally target end users in markets where it believes it can achieve
significant market penetration by providing superior customer care at
competitive prices, the Company may augment its core business strategy by
selectively supplying wholesale services including equipment collocation and
facilities management services to ISPs.
Offer Data, Internet, and Enhanced Services to Enhance Market Penetration
and Reduce Churn. The Company believes it can accelerate new account penetration
and reduce customer churn by offering LAN interconnection, frame relay, Internet
services, ISDN, DSL, Web page design, Web server hosting, and other enhanced
services not generally available from the ILECs (or available only at high
prices) in conjunction with traditional local and long distance services. This
strategy has been successfully employed by certain CLECs, and Allegiance's
management team has extensive experience in providing these types of enhanced
services.
Utilize "Smart Build" Strategy to Maximize Speed to Market and Minimize
Investment Risk. Allegiance plans to deploy digital switching platforms with
local and long distance capability and initially lease fiber trunking capacity
from the ILECs and other CLECs to connect the Company's switch with its
transmission equipment collocated in ILEC central offices. Thereafter,
Allegiance may evolve its networks to the second and third stages of the "smart
build" strategy where Allegiance plans to lease dark fiber or overbuild specific
network segments as economically justified by traffic volume growth. Allegiance
expects that this "smart build" strategy will allow entry into a new market in a
six- to nine-month time frame as compared to the 18 to 24 months required to
construct a metropolitan area fiber network under the "build first, sell later"
approach required before the Telecommunications Act established a framework for
CLECs to acquire unbundled network elements. The Company believes that this
"smart build" approach has the additional advantage of reducing up-front capital
requirements. This "smart build" strategy is currently being
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<PAGE> 42
implemented by the Company in all its networks where it is leasing high capacity
circuits to connect the ILEC central offices with the Company's switches. In New
York City, the Company is moving towards the second stage of its "smart-build"
strategy, where the Company intends to lease from MFN, a thirty-mile dark fiber
ring in Manhattan and extending into Brooklyn.
Achieve Broad Coverage of Attractive Areas within Each Targeted Market. As
a result of the substantial up-front capital requirements necessary to construct
metropolitan area fiber networks, CLECs have traditionally limited their initial
network buildout to highly concentrated downtown areas, thereby limiting their
ability to provide service to customers in other attractive, but geographically
dispersed, portions of their targeted markets. The Company intends to leverage
the benefits of using a "smart build" strategy by selectively deploying its
facilities to address attractive service areas throughout each target market in
order to optimize the Company's penetration. Prior to entering a market,
Allegiance prepares a detailed, "bottoms-up" analysis of that market's local
exchange areas using FCC and demographic data. The Company uses this analysis,
together with estimates of the costs and potential benefits of addressing
particular service areas, to identify attractive areas, determine the optimal
concentration of areas to be served and develop its schedule for network
deployment and expansion.
Maximize Operating Margins by Emphasizing Facilities-Based
Services. Allegiance believes that facilities-based solutions where the Company
provides local exchange, local access, and long distance using its own
facilities should generate significantly higher gross network margins than could
be obtained by reselling such services. As a result, Allegiance plans to deploy
its marketing activities in areas where it can serve customers through a direct
connection using unbundled loops or high capacity circuits connected to
Allegiance's facilities collocated in ILEC central offices. The Company plans to
resell ILEC services only in order to provide comprehensive geographical service
coverage to customers with multiple on-net sites (which can be addressed by the
Company's facilities-based services) and a few off-net sites (which can be
addressed only by the Company's reselling ILEC services).
Build Market Share by Focusing on Direct Sales. The Company believes that
the key to achieving its goals is the capturing and retaining of customers
through direct sales, a full suite of turn-key product offerings and
personalized customer care. Management believes that its targeted small and
medium-sized business customers have been neglected by the ILECs with respect to
these functions. The Company's sales management team is composed of executives
with experience in managing a large number of direct sales specialists in the
telecommunications and data networking industries. Additionally, the Company
believes it will be able to attract and retain highly qualified sales and
support personnel by offering them the opportunity to: (i) work with an
experienced and success-proven management team in building a developing,
entrepreneurial company; (ii) market a comprehensive set of products and
services and customer care options; and (iii) participate in the potential
economic returns made available through a results-oriented compensation package
emphasizing sales commissions and stock options.
Develop Efficient Automated Back Office Systems. Unburdened by existing
legacy OSS, Allegiance is focusing on developing, acquiring and integrating back
office systems to facilitate a smooth, efficient order management, provisioning,
trouble management, billing and collection, and customer service process. To
address this critical issue, the Company has hired a team of engineering and
information technology professionals experienced in the CLEC industry. This team
will work to develop, with the assistance of key third party vendors, OSS that
will synchronize multiple tasks such as provisioning, customer service and
billing and provide management with timely operating and financial data to most
efficiently direct network, sales and customer service resources. The Company
intends to work actively toward "electronic bonding" between the Allegiance OSS
and those of the ILEC, which would permit creation of service requests on-line.
Allegiance believes that these back office systems, once developed, will provide
it with a significant competitive advantage in terms of cost, processing large
order volumes and customer service as compared to companies using legacy
systems.
Expand Customer Base Through Potential Acquisitions. The Company believes
that strategic acquisitions may produce a number of benefits, including
acceleration of market penetration, providing a customer base for cross-selling
additional services, acquiring experienced management and improving margins by
migrating resold services to the Company's network facilities.
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<PAGE> 43
MARKET OPPORTUNITY
U.S. Census Bureau data indicates that the United States communications
services market (including cable television, but excluding Internet access and
content) in 1995 totaled approximately $221 billion in annual revenue. As
depicted on the chart below, wireline telecommunications services (other than
Internet access and content) purchased by non-residential users accounted for
about 43%, or approximately $96 billion, of the total U.S. market in 1995:
[US COMMUNICATIONS MARKET GRAPH]
The major segments of the non-residential wireline telecommunications
services market, based on U.S. Census Bureau data, are as follows:
[NON-RESIDENTIAL WIRELESS TELECOMMUNICATIONS GRAPH]
Traditional voice traffic accounted for the vast majority of non-residential
communications revenue in 1995, with local exchange and exchange access
accounting for over half of the total non-residential wireline
telecommunications market (excluding Internet access and content). Due to its
rapid growth, estimates of data and Internet services revenue are not as well
established as those relating to traditional voice traffic communications.
However, the Company believes that a significant market opportunity exists for
providers of non-residential Internet services.
The Company believes that the rapid opening of the local market to
competition, accelerated growth rates in local traffic related to increases in
Internet access, the desire for multiple suppliers by large businesses, and the
desire for "one-stop shopping" by small and medium-sized businesses and
consumers, presents an opportunity for new entrants to achieve product
differentiation and significant penetration into this very large, established
market. Success in this environment will, in the opinion of management, depend
primarily on
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<PAGE> 44
speed-to-market, marketing creativity and a CLEC's ability to provide
competitively priced services rapidly and accurately, and to issue concise,
accurate integrated billing statements.
Allegiance plans to deploy networks in 24 Tier I markets. The Company
estimates that these 24 markets will include 18 BTAs with more than 20 million
non-residential access lines, representing approximately 44.7% of the total
non-residential access lines in the U.S. With a network deployment and end user,
direct sales marketing strategy focusing on the most significant areas of
business concentration in these areas, Allegiance plans to address a majority of
the non-residential access lines in most of its targeted markets.
THE COMPANY'S TELECOMMUNICATIONS SERVICES
The Company intends to tailor its service offerings to meet the specific
needs of the business, government, and other institutional end users in its
target markets. Management believes that the Company's close contact with
customers from its direct sales force and customer care personnel will enable it
to tailor its service offerings to meet customers' needs and to creatively
package its services to provide "one-stop shopping" solutions for those
customers. The Company plans to offer the following services:
Local Exchange Services. The Company plans to offer local exchange
services, including local dial tone as well as enhanced features such as call
forwarding, call waiting, dial back, caller ID, and voice mail, in all of its
target markets. By offering dial tone service, the Company will also receive
originating and terminating access charges for interexchange calls placed or
received by its subscribers.
PBX/Shared Tenant Services. In areas where telephone density is high and
most telephone customers desire similar services (such as office buildings,
apartments, condominiums or campus-type environments), PBX or shared tenant
services such as Centrex are among the most efficient means of providing
telephone services. The Company will offer these services in areas where market
potential warrants.
ISDN and High Speed Data Services. The Company will offer high speed data
transmission services, such as wide area network ("WAN") interconnection and
broadband Internet access, via frame relay and dedicated point-to-point
connections. In order to provide these services, the Company intends to utilize
leased T1 and higher speed (multiple T1 or T3) fiber connections to medium- and
large-sized business, government, and other institutional customers, while
employing DSL and/or ISDN connections over unbundled copper loops to smaller
business users whose bandwidth requirements may not justify fiber connections or
which are located in areas where T1 connections are not available.
Interexchange/Long Distance Services. The Company will offer a full range
of domestic (interLATA and intraLATA) and international long distance services,
including "1+" outbound calling, inbound toll free service, and such
complementary services as calling cards, operator assistance, and conference
calling.
Enhanced Internet Services. The Company will offer dedicated and dial-up
high speed Internet access services via conventional modem connections, ISDN,
DSL, and T1 and higher speed dedicated connections.
Web Site Design and Hosting Services. The Company intends to offer Web site
design services and will offer Web site hosting on its own computer servers to
provide customers with a turn-key solution that gives them a presence on the
World Wide Web.
Facilities and Systems Integration Services. The Company plans to assist
individual customers with the design and implementation of turn-key solutions in
order to meet their specific needs, including the selection of the customer's
premises equipment, interconnection of LANs and WANs, provision of Advanced
Intelligent Network applications and implementation of virtual private networks.
Wholesale Services to ISPs. The Company believes that with the recent
growth in demand for Internet services, numerous ISPs are unable to obtain
network capacity rapidly enough to meet customer demand and eliminate network
congestion problems. Allegiance plans to supplement its core end user product
offerings by providing a full array of local services to ISPs, including
telephone numbers and switched and dedicated access to the Internet.
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<PAGE> 45
SALES AND CUSTOMER SUPPORT
The Company will offer an integrated package of local exchange, local
access, domestic and international long distance, enhanced voice, data
transmission, and a full suite of Internet services to small and medium-sized
businesses, with "medium-sized" describing a user having approximately 200-300
phone lines and 250 employees. Unlike large corporate, government, or other
institutional users, small and medium-sized businesses often have no in-house
telecommunications manager. Based on management's previous experience,
Allegiance believes that a direct sales and customer care program focusing on
turn-key, "one-stop shopping" solutions will have a competitive advantage in
capturing this type of customers' total telecommunications traffic.
Although the vast majority of the Company's sales force will focus
primarily on the small and medium-sized business segment, the Company also
intends to provide services to large business, government, and other
institutional users, as well as to ISPs, and expects that a significant portion
of its initial revenue will come from these segments. Therefore, Allegiance will
organize its sales and customer care organizations to serve each of these three
market segments. Sales and marketing approaches in the telecommunications market
are market-segment specific, and the Company believes the following are the most
effective approaches with respect to its three targeted market segments:
- Small/medium business -- The Company will use direct sales, print
advertising, and agency programs.
- Large business, government, and other institutional users -- The Company
will use account teams, established business relationships, applications
sales, trade show advertising, and technical journal articles.
- Wholesale (ISPs) -- The Company will use direct sales, established
business relationships, and competitive pricing.
The principal portion of Allegiance's sales and customer care resources
will be dedicated to the small and medium-sized business segment. The Company
will organize account executives into teams with a team manager and a sales
support specialist. These teams will utilize telemarketing to "qualify" leads
and set up initial appointments. The Company will closely manage account
executives with regard to activity (i.e. number of sales calls per week) with
the goal of eventually calling on every prospective business customer in an
account executive's sales territory. The Company intends to use commission plans
and incentive programs to reward and retain the top performers and encourage
strong customer relationships. The sales team managers in a market will report
to a city sales director who will in turn report to a regional vice president.
In addition, each team's sales support specialist will act as a "customer
advocate" for the customers served by that team, so that the customer needs to
contact only one person for sales information and personalized customer service.
The Company's wholesale sales to local and regional ISPs will be performed
by account executives reporting to the city sales director. Account executives
reporting to the senior vice president of national accounts will handle large
national ISPs. The senior vice president of national accounts will also have
responsibility for large corporate, government, and other institutional
accounts, with designated national account managers and sales support personnel
assigned to the major accounts. Unlike the small and medium-sized business
segment, the national account program will be built by recruiting national
account managers with established business relationships with large corporate
accounts, supported by technical applications personnel and customer care
specialists.
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<PAGE> 46
INFORMATION SYSTEMS
Allegiance is currently developing tailored information systems and
procedures for OSS and other back-office systems that it believes will provide a
significant competitive advantage in terms of cost, processing large order
volumes, and customer service. These systems are required to enter, schedule,
provision, and track a customer's order from the point of sale to the
installation and testing of service and also include or interface with trouble
management, inventory, billing, collection and customer service systems. The
required high-level information requirements to support facilities-based service
are depicted in the following figure:
[INFORMATION REQUIREMENTS DIAGRAM]
The legacy systems currently employed by most ILECs, CLECs and long
distance carriers, which were developed prior to the passage of the
Telecommunications Act, generally require multiple entries of customer
information to accomplish order management, provisioning, switch administration
and billing. This process is not only labor intensive, but it creates numerous
opportunities for errors in provisioning service and billing, delays in
installing orders, service interruptions, poor customer service, increased
customer churn, and significant added expenses due to duplicated efforts and the
need to correct service and billing problems. The Company believes that the
practical problems and costs of upgrading legacy systems are often prohibitive
for companies whose existing systems support a large number of customers with
ongoing service. Unburdened by legacy systems, the Company's team of engineering
and information technology professionals experienced in the CLEC industry is
working to develop, with the assistance of key third party vendors, OSS and
other back office systems designed to facilitate a smooth, efficient order
management, provisioning, trouble management, billing and collection, and
customer care process. See "Risk Factors -- Dependence on Billing, Customer
Service and Information Systems."
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<PAGE> 47
Order Management. Allegiance has signed a contract with a third-party
vendor to license their order management software. This product allows the sales
team not only to enter customer orders, but also to monitor the status of the
order as it progresses through the service initiation process.
Provisioning Management. The licensed order management software also
supports the design and management of the provisioning process, including
circuit design and work flow management. The system has been designed to permit
programming into the system of a standard schedule of tasks which must be
accomplished in order to initiate service to a customer, as well as the standard
time intervals during which each such task must be completed. This way, when a
standard order is selected in the system, each required task in the service
initiation process can be efficiently managed to its assigned time interval.
External Interfaces. Several external interfaces are required to initiate
service for a customer. While some of these will be automated initially via
gateways from the order management software, the most important interfaces
(those to the ILEC) will be accomplished initially via fax or e-mail. Certain
ILECs are just beginning to develop automated interfaces on a limited basis.
Allegiance intends to take a lead role with selected ILECs to create standards
for automation of these interfaces.
Network Element Administration. The Company has identified a network
element administration software solution, and Allegiance has signed a contract
with a third-party vendor to license their network element administration
software. The Company is currently developing an interface between its order
management system and the network element manager to integrate data integrity
and eliminate redundant data entry.
Customer Billing. Allegiance has selected a billing services provider, and
a contract for this service is currently being negotiated. Customer information
will be electronically interfaced with this provider from the Company's order
management system via a gateway being developed, thereby integrating all
repositories of information.
Billing Records. Billing records will be generated by the Lucent Series
5ESS(R)-2000 switches to record customer calling activity. These records will be
automatically processed by the billing services provider in order to calculate
and produce bills in a customer-specified billing format.
Allegiance believes this integrated OSS approach will provide for faster
customer service initiation, improved billing accuracy and customization, and a
superior level of customer service. See "Risk Factors -- Dependence on Billing,
Customer Service and Information Systems." The Company will actively work toward
"electronic bonding" between the Allegiance OSS and those of the ILECs, which
would permit creation of service requests on-line.
NETWORK DEPLOYMENT
Allegiance plans to deploy networks in 24 Tier I markets. The Company
estimates that these 24 markets will include 18 BTAs with over 20 million
non-residential access lines, representing approximately 44.7% of the total
non-residential access lines in the U.S. The Company plans to deploy its
networks principally in two phases of development, with Phase I to offer service
in 12 of the largest U.S. metropolitan markets, which the Company believes
include approximately 26.0% of the nation's non-residential access lines. Phase
II will offer service in an additional 12 major U.S. metropolitan markets, which
the Company believes include approximately an additional 18.7% of total U.S.
non-residential access lines. Allegiance is currently operational in three Phase
I markets: New York City, Dallas and Atlanta; and is in the process of deploying
networks in five additional Phase I markets: Chicago, Los Angeles, San
Francisco, Boston and Fort Worth. The following table sets forth the markets
targeted by the Company in Phase I and the Company's current buildout schedule,
although the order and timing of network deployment may vary and will depend on
a number of factors, including recruiting city management, the regulatory
environment, the Company's results
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<PAGE> 48
of operations and the existence of specific market opportunities, such as
acquisitions, and no assurance can be given that the Company will deploy
networks in each such market:
PHASE I MARKET SIZE AND BUILDOUT SCHEDULE
<TABLE>
<CAPTION>
ESTIMATED TOTAL NON- % OF TOTAL U.S. NON- INITIAL FACILITIES-
MARKET RESIDENTIAL ACCESS LINES(1) RESIDENTIAL ACCESS LINES(2) BASED SERVICE DATE(3)
------ --------------------------- --------------------------- ---------------------
(THOUSANDS)
<S> <C> <C> <C>
New York City.................... 3,298(4) 6.7%(4) March 1998
Dallas, TX....................... 867(5) 1.8%(5) April 1998
Atlanta, GA...................... 612 1.2% April 1998
Fort Worth, TX................... --(5) --(5) 3Q, 1998
Chicago, IL...................... 1,951 4.0% 3Q, 1998
Los Angeles, CA.................. 3,430(6) 7.0%(6) 3Q, 1998
Northern New Jersey.............. --(4) --(4) 4Q, 1998
San Francisco, CA................ 2,148(7) 4.4%(7) 4Q, 1998
Boston, MA....................... 649 1.3% 4Q, 1998
Long Island, NY.................. --(4) --(4) 1999
Washington, D.C.................. 871 1.8% 1999
Orange County, CA................ --(6) --(6) 1999
------ -----
Total.................. 13,826(7) 28.2%(7)
</TABLE>
- ---------------
(1) Data as of December 31, 1996.
(2) Based on an estimated 49.0 million U.S. non-residential access lines as of
December 31, 1996.
(3) Refers to the first month during which the Company could offer
facilities-based service or the quarter or year during which the Company
expects to be able to offer facilities-based service based on its current
business plan.
(4) Data for New York City also includes Northern New Jersey and Long Island,
NY.
(5) Data for Dallas, TX also includes Fort Worth, TX.
(6) Data for Los Angeles, CA also includes Orange County, CA.
(7) Data for San Francisco, CA also includes San Jose, CA and Oakland, CA, both
of which are Phase II markets.
The following table sets forth the markets targeted by the Company in Phase
II and the Company's current buildout schedule, although the order and timing of
network deployment may vary and will depend on a number of factors, including
recruiting city management, the regulatory environment, the Company's results of
operations and the existence of specific market opportunities, such as
acquisitions, and no assurance can be given that the Company will deploy
networks in each such market. Management currently expects to
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<PAGE> 49
commence network deployment in the following Phase II markets in 1999, with
service anticipated to begin during 1999 and 2000.
PHASE II MARKET SIZE AND BUILDOUT SCHEDULE
<TABLE>
<CAPTION>
ESTIMATED TOTAL NON- % OF TOTAL U.S. NON-
MARKET RESIDENTIAL ACCESS LINES(1) RESIDENTIAL ACCESS LINES(2)
------ --------------------------- ---------------------------
(THOUSANDS)
<S> <C> <C>
San Jose, CA..................................... --(3) --(3)
Oakland, CA...................................... --(3) --(3)
San Diego, CA.................................... 790 1.6%
Houston, TX...................................... 765 1.6%
Philadelphia, PA................................. 1,754 3.6%
Detroit, MI...................................... 821 1.7%
Denver, CO....................................... 632 1.3%
Baltimore, MD.................................... 639 1.3%
Seattle, WA...................................... 779 1.6%
Miami, FL........................................ 769 1.6%
St. Louis, MO.................................... 449 0.9%
Cleveland, OH.................................... 654 1.3%
-----
Total.................................. 8,052(3) 16.5%(3)
</TABLE>
- ---------------
(1) Data as of December 31, 1996.
(2) Based on an estimated 49.0 million U.S. non-residential access lines as of
December 31, 1996.
(3) Data for San Jose, CA and Oakland, CA is included in data for San Francisco,
CA in Phase I above.
In the majority of its targeted markets, Allegiance will initially deploy
switches and collocate transmission equipment in ILEC central offices with heavy
concentrations of non-residential access lines. Over time, the Company plans to
expand its networks throughout the metropolitan areas to address the majority of
the business market in each area. In some markets, such as Northern New Jersey,
Allegiance will not initially deploy its own switch, but will deploy
transmission equipment in major central offices and route traffic to an existing
Allegiance switch until traffic growth warrants the addition of a switch to
service that market.
NETWORK ARCHITECTURE
Allegiance is deploying Lucent Series 5ESS(R)-2000 digital switches in New
York City, Dallas, Atlanta, Chicago, Los Angeles and San Francisco. The Company
currently plans to deploy similar switches in its other markets. As a result of
the network unbundling provisions of the Telecommunications Act, the Company
believes it can accelerate its market entry, reduce its initial capital
requirements and mitigate risks in estimating market share growth by employing a
"smart build" strategy. The Company plans to install the Lucent switch and
related equipment at a central location in each market and deploy transmission
equipment in ILEC central offices. Allegiance intends initially to lease local
network trunking facilities from the ILEC and/or one or more CLECs in order to
connect Allegiance's switch to major ILEC central offices serving the central
business district and outlying areas of business concentrations in each market.
The switch will also be connected to ILEC tandem switches and certain
interexchange carrier ("IXC") points-of-presence ("POPs"). Allegiance will
deploy integrated digital loop carriers ("IDLCs") and related equipment in each
of the ILEC central offices in which it is connected. As each customer is
obtained, service will be provisioned by leasing unbundled loops from the ILEC
to connect the Company's IDLC (located in the serving central office) to the
customer premise equipment. For large business, government, or other
institutional customers or for numerous customers located in large buildings, it
may be more cost-effective for Allegiance to use leased ILEC or CLEC capacity in
the 1.5 to 150 megabit range (or perhaps a wireless local loop leased from one
of the emerging wireless CLECs) to connect the customer(s) to the Allegiance
network. In this case, Allegiance
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<PAGE> 50
will locate its IDLC or other equipment in the customer's building. A diagram of
the Company's typical network layout is presented in the following figure:
[ALLEGIANCE NETWORK DIAGRAM]
Although Allegiance will initially lease its local network transmission
facilities, the Company plans to replace leased trunk capacity with its own
fiber optic facilities as and when it experiences sufficient traffic volume
growth between its switch and specific ILEC central offices.
Allegiance will employ a similar "success-based" strategy to manage its
long distance network expenses. Initially, the Company will resell long distance
transmission services by buying minutes on a wholesale basis. As traffic on a
specific route increases (for example, on the New York City-Chicago route),
Allegiance will subsequently lease long distance trunk capacity connecting its
switches between the two markets. Allegiance would thus transport its calls from
New York City to Chicago (or vice versa) over its own network and terminate the
calls at the ILEC tandem switch in Chicago. For international calls, the Company
plans to negotiate agreements with various international carriers for
termination of its international calls throughout the world. As Allegiance's
international traffic volumes increase to major destinations (e.g. Canada,
Mexico, the United Kingdom, France, Germany and Japan), the Company expects to
be able to improve its resale margins.
IMPLEMENTATION OF SERVICES
In order to offer services in a market, Allegiance generally must secure
certification from the state regulator and typically must file tariffs or price
lists for the services that it will offer. The certification process varies from
state to state; however, the fundamental requirements are largely the same.
State regulators require new entrants to demonstrate that they have secured
adequate financial resources to establish and maintain good customer service.
New entrants are also required to show that they have a staff that possesses the
knowledge and ability required to establish and operate a telecommunications
network. Allegiance has made such demonstrations in Texas, California, Maryland
and New York, where the Company has obtained
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<PAGE> 51
certificates to provide local exchange and intrastate toll service as well as in
Georgia where the Company was granted a certificate to provide local exchange
service. Applications for such authority are pending in Illinois and the
District of Columbia. The Company intends to file similar applications in the
near future for Massachusetts, New Jersey and Virginia.
Before providing local service, a new entrant must negotiate and execute an
interconnection agreement with the ILEC. While such agreements can be voluminous
and may take months to negotiate, most of the key interconnection issues have
now been thoroughly addressed and commissions in most states have ruled on
arbitrations between the ILECs and new entrants. New entrants may adopt an
interconnection agreement already entered into by the ILEC and another carrier.
Such an approach will be selectively adopted by Allegiance to enable it to enter
markets quickly while at the same time preserving its right to replace the
adopted agreement with a customized interconnection agreement that can be
negotiated once service has already been established. For example, Allegiance
has adopted the interconnection agreement entered into between Southwestern Bell
and WinStar Communications, Inc. in Texas and has begun to negotiate
enhancements to that agreement for ultimate inclusion in Allegiance's customized
agreement with Southwestern Bell.
While such interconnection agreements include key terms and prices for
interconnection circuits, a significant joint implementation effort must be made
with the ILEC in order to establish operationally efficient and reliable traffic
interchange arrangements. Such interchange arrangements must include those
between the new entrant's network and the facilities of other service providers
as well as public service agencies. For example, Allegiance worked closely with
Southwestern Bell in order to devise and implement an efficient 911 call routing
plan that will meet the requirements of each individual 911 service bureau in
Southwestern Bell areas that Allegiance will serve using its own switches.
Allegiance has begun to meet with key personnel from 911 service bureaus to
obtain their acceptance and to establish dates for circuit establishment and
joint testing. Other examples of traffic interchange and interconnection
arrangements utilizing the ILEC's network include connectivity to its
out-of-band signaling facilities, interconnectivity to the ILEC's operator
services and directory assistance personnel, and access through the ILEC to the
networks of wireless companies and interexchange carriers.
After the initial implementation activities are completed in a market, an
on-going trunking capacity management plan must be followed to ensure that
adequate quantities of network facilities (e.g., interconnection trunks) are in
place, and a contingency plan must be devised to address spikes in demand caused
by events such as a larger-than-expected customer sale in a relatively small
geographic area.
REGULATION
The Company's telecommunications services business is subject to varying
degrees of federal, state and local regulation.
Federal Regulation
The FCC regulates interstate and international telecommunications services.
The Company provides service on a common carrier basis. The FCC imposes certain
regulations on common carriers such as the RBOCs that have some degree of market
power. The FCC imposes less regulation on common carriers without market power
including, to date, CLECs. The FCC requires common carriers to receive an
authorization to construct and operate telecommunications facilities, and to
provide or resell telecommunications services, between the United States and
international points.
In August 1996, the FCC released a decision (the "Interconnection
Decision") establishing rules implementing the Telecommunications Act
requirements that ILECs negotiate interconnection agreements and providing
guidelines for review of such agreements by state public utilities commissions.
On July 18, 1997, the Eighth Circuit vacated certain portions of the
Interconnection Decision, including provisions establishing a pricing
methodology and a procedure permitting new entrants to "pick and choose" among
various provisions of existing interconnection agreements between ILECs and
their competitors. On October 14, 1997, the Eighth Circuit issued a decision
vacating additional FCC rules that will likely have the effect of increasing the
cost of obtaining the use of combinations of an ILEC's unbundled network
elements. The Eighth Circuit
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<PAGE> 52
decision creates uncertainty about the rules governing pricing and the terms and
conditions of interconnection agreements, and could make negotiating and
enforcing such agreements more difficult and protracted and may require
renegotiation of existing agreements. There can be no assurance that the Company
will be able to obtain or enforce interconnection agreements on terms acceptable
to the Company. The Supreme Court has granted a writ of certiorari to review the
Eighth Circuit decision.
In October 1996, the FCC adopted an order in which it eliminated the
requirement that non-dominant interstate carriers such as the Company maintain
tariffs on file with the FCC for domestic interstate services. This order
applies to all non-dominant interstate carriers, including AT&T. The order does
not apply to the switched and special access services of the RBOCs or other
local exchange providers. The FCC order was issued pursuant to authority granted
to the FCC in the Telecommunications Act to "forbear" from regulating any
telecommunications services provider if the FCC determines that the public
interest will be served. After a nine-month transition period, relationships
between interstate carriers and their customers will be set by contract. At that
point long distance companies may no longer file with the FCC tariffs for
interstate, domestic, interexchange services. Carriers have the option to
immediately cease filing tariffs. Several parties have filed notices for
reconsideration of the FCC order and other parties appealed the decision. On
February 13, 1997, the United States Court of Appeals for the District of
Columbia Circuit stayed the implementation of the FCC order pending its review
of the order on the merits. Currently, that temporary stay remains in effect.
If the stay is lifted and the FCC order becomes effective,
telecommunications carriers such as the Company will no longer be able to rely
on the filing of tariffs with the FCC as a means of providing notice to
customers of prices, terms and conditions on which they offer their interstate
services. The obligation to provide non-discriminatory, just and reasonable
prices remains unchanged under the Communications Act of 1934, as amended (the
"Communications Act"). While tariffs provided a means of providing notice of
prices, terms and conditions, the Company intends to rely primarily on its sales
force and direct marketing to provide such information to its customers.
The Telecommunications Act is intended to increase competition. The act
opens the local services market by requiring ILECs to permit interconnection to
their networks and establishing ILEC obligations with respect to:
Reciprocal Compensation. Requires all ILECs and CLECs to complete calls
originated by competing carriers under reciprocal arrangements at prices based
on a reasonable approximation of incremental cost or through mutual exchange of
traffic without explicit payment.
Resale. Requires all ILECs and CLECs to permit resale of their
telecommunications services without unreasonable restrictions or conditions. In
addition, ILECs are required to offer wholesale versions of all retail services
to other telecommunications carriers for resale at discounted rates, based on
the costs avoided by the ILEC in the wholesale offering.
Interconnection. Requires all ILECs and CLECs to permit their competitors
to interconnect with their facilities. Requires all ILECs to permit
interconnection at any technically feasible point within their networks, on
nondiscriminatory terms, at prices based on cost (which may include a reasonable
profit). At the option of the carrier seeking interconnection, collocation of
the requesting carrier's equipment in the ILECs' premises must be offered,
except where an ILEC can demonstrate space limitations or other technical
impediments to collocation.
Unbundled Access. Requires all ILECs to provide nondiscriminatory access to
unbundled network elements (including, network facilities, equipment, features,
functions, and capabilities) at any technically feasible point within their
networks, on nondiscriminatory terms, at prices based on cost (which may include
a reasonable profit).
Number Portability. Requires all ILECs and CLECs to permit users of
telecommunications services to retain existing telephone numbers without
impairment of quality, reliability or convenience when switching from one
telecommunications carrier to another.
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Dialing Parity. Requires all ILECs and CLECs to provide "1+" equal access
to competing providers of telephone exchange service and toll service, and to
provide nondiscriminatory access to telephone numbers, operator services,
directory assistance, and directory listing, with no unreasonable dialing
delays.
Access to Rights-of-Way. Requires all ILECs and CLECs to permit competing
carriers access to poles, ducts, conduits and rights-of-way at regulated prices.
ILECs are required to negotiate in good faith with carriers requesting any
or all of the above arrangements. If the negotiating carriers cannot reach
agreement within a prescribed time, either carrier may request binding
arbitration of the disputed issues by the state regulatory commission. Where an
agreement has not been reached, ILECs remain subject to interconnection
obligations established by the FCC and state telecommunication regulatory
commissions.
On May 8, 1997, the FCC released an order establishing a significantly
expanded federal universal service subsidy regime. For example, the FCC
established new subsidies for telecommunications and information services
provided to qualifying schools and libraries with an annual cap of $2.3 billion
and for services provided to rural health care providers with an annual cap of
$400.0 million. The FCC also expanded the federal subsidies for local exchange
telephone services provided to low-income consumers. Providers of interstate
telecommunications service, such as the Company, as well as certain other
entities, must pay for these programs. The Company's share of these federal
subsidy funds will be based on its share of certain defined telecommunications
end user revenues. Currently, the FCC is assessing such payments on the basis of
a provider's revenue for the previous year; since the Company had no significant
revenues in 1997, it will not be liable for subsidy payments in any material
amount during 1998. With respect to subsequent years, however, the Company is
currently unable to quantify the amount of subsidy payments that it will be
required to make or the effect that these required payments will have on its
financial condition. In the May 8th order, the FCC also announced that it will
soon revise its rules for subsidizing service provided to consumers in high cost
areas, which may result in further substantial increases in the overall cost of
the subsidy program. Several parties have appealed the May 8th order. Such
appeals have been consolidated and transferred to the United States Court of
Appeals for the Fifth Circuit where they are currently pending. In addition, on
July 3, 1997, several ILECs filed a petition for stay of the May 8th order with
the FCC. That petition is pending.
The Telecommunications Act codifies the ILECs' equal access and
nondiscrimination obligations and preempts inconsistent state regulation. The
Telecommunications Act also contains special provisions that eliminate the AT&T
Antitrust Consent Decree (and similar antitrust restrictions on the GTOCs)
restricting the RBOCs from providing long distance services and engaging in
telecommunications equipment manufacturing. The Telecommunications Act permitted
the RBOCs to enter the out-of-region long distance market immediately upon its
enactment. Further, provisions of the Telecommunications Act permit a RBOC to
enter the long distance market in its traditional service area if it satisfies
several procedural and substantive requirements, including obtaining FCC
approval upon a showing that the RBOC has entered into interconnection
agreements (or, under some circumstances, has offered to enter into such
agreements) in those states in which it seeks long distance relief, the
interconnection agreements satisfy a 14-point "checklist" of competitive
requirements, and the FCC is satisfied that the RBOC's entry into long distance
markets is in the public interest. To date, several petitions by RBOCs for such
entry have been denied by the FCC, and none have been granted.
On December 31, 1997, the U.S. District Court for the Northern District of
Texas issued the SBC Decision finding that Sections 271 to 275 of the
Telecommunications Act are unconstitutional. These sections of the
Telecommunications Act impose restrictions on the lines of business in which the
RBOCs may engage, including establishing the conditions they must satisfy before
they may provide in-region interLATA telecommunications services. The SBC
Decision has been stayed pending appeal. If the SBC Decision is upheld on
appeal, however, the RBOCs would be able to provide such in-region services
immediately without satisfying the statutory conditions. The Company believes
that the factual assumptions and legal reasoning in the SBC Decision are
erroneous and that the decision will likely be reversed on appeal, although
there can be no assurance of this outcome. If the SBC Decision is upheld on
appeal, it would likely have an unfavorable effect on the Company's business for
at least two reasons. First, the SBC Decision removes the incentive
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RBOCs have to cooperate with companies like Allegiance to foster competition
within their service areas so that they can qualify to offer in-region interLATA
services because the decision allows RBOCs to offer such services immediately.
However, the SBC Decision does not affect other provisions of the Act which
create legal obligations for all ILECs to offer interconnection and network
access. Second, the Company is legally able to offer its customers both long
distance and local exchange services, which the RBOCs currently may not do. This
ability to offer "one-stop shopping" gives the Company a marketing advantage
that it would no longer enjoy if the SBC Decision were upheld on appeal. See
"-- Competition."
Under the Telecommunications Act, any entity, including cable television
companies and electric and gas utilities, may enter any telecommunications
market, subject to reasonable state regulation of safety, quality and consumer
protection. Because implementation of the Telecommunications Act is subject to
numerous federal and state policy rulemaking proceedings and judicial review
there is still uncertainty as to what impact such legislation will have on the
Company.
Pursuant to authority granted by the FCC, the Company will resell the
international telecommunications services of other common carriers between the
United States and international points. In connection with such authority, the
Company's subsidiary, Allegiance Telecom International, Inc., has filed tariffs
with the FCC stating the rates, terms and conditions for its international
services.
With respect to its domestic service offerings, various subsidiaries of the
Company have filed tariffs with the FCC stating the rates, terms and conditions
for their interstate services. The Company's tariffs are generally not subject
to pre-effective review by the FCC, and can be amended on one day's notice. The
Company's interstate services are provided in competition with interexchange
carriers and, with respect to access services, the ILECs. With limited
exceptions, the current policy of the FCC for most interstate access services
dictates that ILECs charge all customers the same price for the same service.
Thus, the ILECs generally cannot lower prices to those customers likely to
contract for their services without also lowering charges for the same service
to all customers in the same geographic area, including those whose
telecommunications requirements would not justify the use of such lower prices.
The FCC may, however, alleviate this constraint on the ILECs and permit them to
offer special rate packages to very large customers, as it has done in a few
cases, or permit other forms of rate flexibility. The FCC has adopted some
proposals that significantly lessen the regulation of ILECs that are subject to
competition in their service areas and provide such ILECs with additional
flexibility in pricing their interstate switched and special access on a central
office specific basis; and, as discussed in the following paragraph, is
considering expanding such flexibility.
In two orders released on December 24, 1996, and May 16, 1997, the FCC made
major changes in the interstate access charge structure. In the December 24th
order, the FCC removed restrictions on ILECs' ability to lower access prices and
relaxed the regulation of new switched access services in those markets where
there are other providers of access services. If this increased pricing
flexibility is not effectively monitored by federal regulators, it could have a
material adverse effect on the Company's ability to compete in providing
interstate access services. The May 16th order substantially increased the costs
that ILECs subject to the FCC's price cap rules ("price cap LECs") recover
through monthly, non-traffic sensitive access charges and substantially decrease
the costs that price cap LECs recover through traffic sensitive access charges.
In the May 16th order, the FCC also announced its plan to bring interstate
access rate levels more in line with cost. The plan will include rules that are
expected to be established sometime in 1998 that may grant price cap LECs
increased pricing flexibility upon demonstrations of increased competition (or
potential competition) in relevant markets. The manner in which the FCC
implements this approach to lowering access charge levels could have a material
effect on the Company's ability to compete in providing interstate access
services. Several parties have appealed the May 16th order. Those appeals have
been consolidated and transferred to the United States Court of Appeals for the
Eighth Circuit where they are currently pending.
A number of ILECs around the country have been contesting whether the
obligation to pay reciprocal compensation to CLECs should apply to local
telephone calls terminating to ISPs. The ILECs claim that this traffic is
interstate in nature and therefore should be exempt from compensation
arrangements applicable to local, intrastate calls. The FCC, however, has
determined on a number of occasions, most recently in its
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May 16, 1997, access charge reform order, that calls to ISPs should be exempt
from interstate access charges and should be governed by local exchange tariffs.
Currently, the state commissions in Delaware, Maryland, Missouri, New York,
North Carolina, Oklahoma, Pennsylvania, Virginia, Arizona, Connecticut,
Colorado, Illinois, Michigan, Minnesota, Oregon, Washington, West Virginia and
Texas have ruled that reciprocal compensation arrangements do apply to ISP
traffic. However, certain of these rulings are subject to appeal. Disputes over
the appropriate treatment of ISP traffic are pending in California, Georgia, and
Massachusetts. The Company anticipates that ISPs will be among its target
customers, and adverse decisions in these proceedings could limit the Company's
ability to serve this group of customers profitably.
State Regulation
The Telecommunications Act is intended to increase competition in the
telecommunications industry, especially in the local exchange market. With
respect to local services, ILECs are required to allow interconnection to their
networks and to provide unbundled access to network facilities, as well as a
number of other procompetitive measures. Because the implementation of the
Telecommunications Act is subject to numerous state rulemaking proceedings on
these issues, it is currently difficult to predict how quickly full competition
for local services, including local dial tone, will be introduced.
State regulatory agencies have regulatory jurisdiction when Company
facilities and services are used to provide intrastate services. A portion of
the Company's current traffic may be classified as intrastate and therefore
subject to state regulation. The Company expects that it will offer more
intrastate services (including intrastate switched services) as its business and
product lines expand and state regulations are modified to allow increased local
services competition. To provide intrastate services, the Company generally must
obtain a certificate of public convenience and necessity from the state
regulatory agency and comply with state requirements for telecommunications
utilities, including state tariffing requirements. The Company has obtained such
certificates to provide local exchange and intrastate toll service in Texas,
California, Maryland and New York. In Georgia, the Company was granted a
certificate to provide local exchange service. Applications for such authority
are pending in Illinois and the District of Columbia. The Company intends to
file similar applications in the near future for Massachusetts, New Jersey and
Virginia. There can be no assurance that such state authorizations will be
granted.
Local Regulation
The Company's networks are subject to numerous local regulations such as
building codes and licensing. Such regulations vary on a city by city and county
by county basis. To the extent the Company decides in the future to install its
own fiber optic transmission facilities, it will need to obtain rights-of-way
over private and publicly owned land. There can be no assurance that such
rights-of-way will be available to the Company on economically reasonable or
advantageous terms.
COMPETITION
The telecommunications industry is highly competitive. The Company believes
that the principal competitive factors affecting its business will be pricing
levels and clear pricing policies, customer service, accurate billing and, to a
lesser extent, variety of services. The ability of the Company to compete
effectively will depend upon its continued ability to maintain high quality,
market-driven services at prices generally equal to or below those charged by
its competitors. To maintain its competitive posture, the Company believes that
it must be in a position to reduce its prices in order to meet reductions in
rates, if any, by others. Any such reductions could adversely affect the
Company. Many of the Company's current and potential competitors have financial,
personnel and other resources, including brand name recognition, substantially
greater than those of the Company, as well as other competitive advantages over
the Company.
Local Exchange Carriers ("LECs"). In each of the markets targeted by the
Company, the Company will compete principally with the ILEC serving that area,
such as BellSouth, Southwestern Bell, or Bell Atlantic Corporation. The Company
believes the RBOCs' primary agenda is to be able to offer long distance service
in their service territories. The independent telcos have already achieved this
goal with good early
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returns. Many experts expect the RBOCs to be successful in entering the long
distance market in a few states by early 1998 and in all states by mid-1999. The
Company believes the RBOCs expect to offset share losses in their local markets
by capturing a significant percentage of the in-region long distance market,
especially in the residential segment where the RBOCs' strong regional brand
names and extensive advertising campaigns may be very successful. In the event
that the SBC Decision, which held that the Telecommunications Act's restrictions
on the lines of business in which RBOCs may engage (including the conditions to
the RBOCs provision of in-region interLATA telecommunications services) are
unconstitutional, is upheld, the RBOCs would immediately thereafter be able to
enter the long distance market in their service territories. See
"-- Regulation."
As a recent entrant in the integrated telecommunications services industry,
the Company has not achieved and does not expect to achieve a significant market
share for any of its services. In particular, the ILECs have long-standing
relationships with their customers, have financial, technical and marketing
resources substantially greater than those of the Company, have the potential to
subsidize competitive services with revenues from a variety of businesses and
currently benefit from certain existing regulations that favor the ILECs over
the Company in certain respects. While recent regulatory initiatives, which
allow CLECs such as the Company to interconnect with ILEC facilities, provide
increased business opportunities for the Company, such interconnection
opportunities have been (and likely will continue to be) accompanied by
increased pricing flexibility for and relaxation of regulatory oversight of the
ILECs.
ILECs have long-standing relationships with regulatory authorities at the
federal and state levels. While recent FCC administrative decisions and
initiatives provide increased business opportunities to telecommunications
providers such as the Company, they also provide the ILECs with increased
pricing flexibility for their private line and special access and switched
access services. In addition, with respect to competitive access services (as
opposed to switched local exchange services), the FCC recently proposed a rule
that would provide for increased ILEC pricing flexibility and deregulation for
such access services either automatically or after certain competitive levels
are reached. If the ILECs are allowed by regulators to offer discounts to large
customers through contract tariffs, engage in aggressive volume and term
discount pricing practices for their customers, and/or seek to charge
competitors excessive fees for interconnection to their networks, the income of
competitors to the ILECs, including the Company, could be materially adversely
affected. If future regulatory decisions afford the ILECs increased access
services pricing flexibility or other regulatory relief, such decisions could
also have a material adverse effect on competitors to the ILEC, including the
Company.
Competitive Access Carriers/Competitive Local Exchange Carriers/IXCs/Other
Market Entrants. The Company also faces, and expects to continue to face,
competition from other current and potential market entrants, including long
distance carriers seeking to enter, reenter or expand entry into the local
exchange market such as AT&T, MCI, and Sprint, and from other CLECs, resellers
of local exchange services, CAPs, cable television companies, electric
utilities, microwave carriers, wireless telephone system operators and private
networks built by large end users. In addition, a continuing trend toward
consolidation of telecommunications companies and the formation of strategic
alliances within the telecommunications industry, as well as the development of
new technologies, could give rise to significant new competitors to the Company.
For example, WorldCom acquired MFS in December 1996, has recently acquired
another CLEC, Brooks Fiber Properties, Inc., and has a pending agreement to
merge with MCI. In January 1998 AT&T announced its intention to acquire Teleport
Communications Group Inc. These types of consolidations and strategic alliances
could put the Company at a competitive disadvantage. The Telecommunications Act
includes provisions which impose certain regulatory requirements on all local
exchange carriers, including competitors such as the Company, while granting the
FCC expanded authority to reduce the level of regulation applicable to any or
all telecommunications carriers, including ILECs. The manner in which these
provisions of the Telecommunications Act are implemented and enforced could have
a material adverse effect on the Company's ability to successfully compete
against ILECs and other telecommunications service providers. The Company also
competes with equipment vendors and installers, and telecommunications
management companies with respect to certain portions of its business.
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The changes in the Telecommunications Act radically altered the market
opportunity for traditional CAPs and CLECs. Due to the fact that most existing
CAP/CLECs initially entered the market providing dedicated access in the
pre-1996 era, these companies had to build a fiber infrastructure before
offering services. Switches were added by most CAP/CLECs in the last year to
take advantage of the opening of the local market. With the Telecommunications
Act requiring unbundling of the LEC networks, CAP/CLECs will now be able to more
rapidly enter the market by installing switches and leasing trunk and loop
capacity until traffic volume justifies building facilities. New CLECs will not
have to replicate existing facilities and can be more opportunistic in designing
and implementing networks.
The Company believes the major IXCs (AT&T, MCI, Sprint) in the short term
have a two pronged strategy: (1) keep the RBOCs out of in-region long distance
as long as possible and (2) develop a local resale product with adequate margins
to stem RBOC attacks on the major IXCs' market shares. The Company believes the
IXCs' longer term strategy is to develop facilities-based and unbundled local
service, an approach already being pursued by WorldCom with the acquisition of
MFS, and more recently by AT&T with its proposed acquisition of Teleport
Communications.
Competition for Provision of Long Distance Services. The long distance
telecommunications industry has numerous entities competing for the same
customers and a high average churn rate, as customers frequently change long
distance providers in response to the offering of lower rates or promotional
incentives by competitors. Prices in the long distance market have declined
significantly in recent years and are expected to continue to decline. The
Company expects to increasingly face competition from companies offering long
distance data and voice services over the Internet. Such companies could enjoy a
significant cost advantage because they do not currently pay carrier access
charges or universal service fees.
Data/Internet Services Providers. The Internet services market is highly
competitive, and the Company expects that competition will continue to
intensify. The Company's competitors in this market will include ISPs, other
telecommunications companies, online services providers and Internet software
providers. Many of these competitors have greater financial, technological and
marketing resources than those available to the Company.
Competition from International Telecommunications Providers. Under the
recent WTO agreement on basic telecommunications services, the United States and
72 other members of the WTO committed themselves to opening their respective
telecommunications markets and/or foreign ownership and/or to adopting
regulatory measures to protect competitors against anticompetitive behavior by
dominant telecommunications companies, effective in some cases as early as
January 1998. Although the Company believes that the WTO agreement could provide
the Company with significant opportunities to compete in markets that were not
previously accessible and to provide more reliable services at lower costs than
the Company could have provided prior to implementation of the WTO agreement, it
could also provide similar opportunities to the Company's competitors. There can
be no assurance that the pro-competitive effects of the WTO agreement will not
have a material adverse effect on the Company's business, financial condition
and results of operations or that members of the WTO will implement the terms of
the WTO agreement. See "Risk Factors -- Competition."
EMPLOYEES
As of May 1, 1998, the Company had a total of 183 employees. The Company
believes that its future success will depend on its continued ability to attract
and retain highly skilled and qualified employees. None of the Company's
employees are currently represented by a collective bargaining agreement. The
Company believes that it enjoys good relationships with its employees.
LEGAL PROCEEDINGS
On August 29, 1997, WorldCom sued the Company and two of its Senior Vice
Presidents. In its complaint, WorldCom alleges that these employees violated
certain noncompete and nonsolicitation agreements by accepting employment with
the Company and by soliciting then-current WorldCom employees to leave
WorldCom's employment and join the Company. In addition, WorldCom claims that
the Company
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tortiously interfered with WorldCom's relationships with its employees, and that
the Company's behavior constituted unfair competition. WorldCom seeks injunctive
relief, including barring two of the Company's executives from continued
employment with the Company, and monetary damages, although it has filed no
motion for a temporary restraining order or preliminary injunction. The Company
denies all claims and will vigorously defend itself. The Company does not expect
the ultimate outcome of this matter to have a material adverse effect on the
results of operations or financial condition of the Company.
On October 7, 1997, the Company filed a counterclaim against WorldCom for,
among other things, attempted monopolization of the "one-stop shopping"
telecommunications market, abuse of process, and unfair competition. WorldCom
did not move to dismiss the attempted monopolization claim, but moved to dismiss
the abuse of process and unfair competition claims. On March 4, 1998, the court
dismissed the claim for unfair competition.
The Company is not party to any other pending legal proceedings that the
Company believes would, individually or in the aggregate, have a material
adverse effect on the Company's financial condition or results of operations.
FACILITIES
The Company is headquartered in Dallas, Texas and leases offices and space
in a number of locations, primarily for sales offices and network equipment
installations. The table below lists the Company's current leased facilities:
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION LEASE EXPIRATION SQUARE FOOTAGE
-------- ---------------- --------------
<S> <C> <C>
Dallas, TX.................................................. January 2008 40,000
Atlanta, GA................................................. February 2003 7,400
Atlanta, GA................................................. August 1998 1,000
Atlanta, GA................................................. November 2001 7,900
Chicago, IL................................................. February 2009 9,200
Chicago, IL................................................. July 2008 14,000
Los Angeles, CA............................................. June 2008 11,000
Los Angeles, CA............................................. June 2008 10,000
New York, NY................................................ August 2006 8,700
New York, NY................................................ April 2008 19,500
Westchester, IL............................................. January 2001 10,600
</TABLE>
The Company believes that its leased facilities are adequate to meet its
current needs in the eight markets in which it has begun to deploy networks, and
that additional facilities are available to meet its development and expansion
needs in existing and projected target markets for the foreseeable future.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES
The following table sets forth certain information concerning the
directors, executive officers and other key personnel of the Company, including
their ages as of May 1, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
Royce J. Holland(1).......... 49 Chairman of the Board and Chief Executive Officer
C. Daniel Yost............... 49 President and Chief Operating Officer, and Director
Thomas M. Lord............... 41 Executive Vice President of Corporate Development, Chief
Financial Officer, and Director
John J. Callahan............. 48 Senior Vice President of Sales and Marketing, and
Director
Dana A. Crowne............... 37 Senior Vice President and Chief Engineer
Stephen N. Holland........... 46 Senior Vice President and Chief Information Officer
Patricia E. Koide............ 49 Senior Vice President of Human Resources, Real Estate,
Facilities and Administration
Gregg A. Long................ 44 Senior Vice President of Development and Regulatory
L.C. Baird................... 54 Regional Vice President -- Southeast Division
Anthony J. Parella........... 38 Regional Vice President -- Central Division
Lawrence A. Price............ 35 Regional Vice President -- Northeast Division
Paul D. Carbery.............. 37 Director
James E. Crawford, III(1).... 52 Director
John B. Ehrenkranz........... 33 Director
Paul J. Finnegan............. 44 Director
Richard D. Frisbie........... 48 Director
Reed E. Hundt................ 49 Director
Robert H. Niehaus (1)........ 42 Director
James N. Perry, Jr. (1)...... 37 Director
</TABLE>
- ---------------
(1) Member of the Board's Executive Committee.
Royce J. Holland, the Company's Chairman of the Board and Chief Executive
Officer, has more than 25 years of experience in the telecommunications,
independent power and engineering/construction industries. Prior to founding
Allegiance in April 1997, Mr. Holland was one of several co-founders of MFS,
where he served as President and Chief Operating Officer from April 1990 until
September 1996 and as Vice Chairman from September 1996 to February 1997. In
January 1993, Mr. Holland was appointed by President George Bush to the National
Security Telecommunications Advisory Committee. Mr. Holland also presently
serves on the Board of Directors of CSG Systems, a publicly held billing
services company. Mr. Holland's brother, Stephen N. Holland, is employed as the
Company's Senior Vice President and Chief Information Officer.
C. Daniel Yost, who joined the Company as President and Chief Operating
Officer in February 1998, was elected to the Company's Board of Directors in
March 1998. Mr. Yost has more than 26 years of experience in the
telecommunications industry. From July 1997 until he joined the Company, Mr.
Yost was the President and Chief Operating Officer for U.S. Operations of Netcom
On-Line Communications Services, Inc., a leading Internet service provider. Mr.
Yost served as the President, Southwest Region of AT&T Wireless Services, Inc.
from June 1994 to July 1997. Prior to that, from July 1991 to June 1994, Mr.
Yost was the President, Southwest Region of McCaw Cellular Communications/LIN
Broadcasting.
Thomas M. Lord, a co-founder and Director of the Company and its Executive
Vice President of Corporate Development and Chief Financial Officer, is
responsible for overseeing the Company's mergers and acquisitions, corporate
finance and investor relations functions. Mr. Lord is an 18-year veteran in
investment banking, securities research and portfolio management, including
serving as a managing director of Bear, Stearns & Co. Inc. from January 1986 to
December 1996. In the five-year period ending December 1996,
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Mr. Lord oversaw 43 different transactions valued in excess of $6.2 billion for
the telecommunications, information services and technology industries.
John J. Callahan, who joined the Company as Senior Vice President of Sales
and Marketing in December 1997, has more than 18 years of experience in the
telecommunications industry. Most recently, Mr. Callahan was President of the
Western Division for MFS from December 1991 to November 1997, where he was
responsible for the company's sales and operations in Arizona, California,
Georgia, Florida, Illinois, Michigan, Missouri, Ohio, Oregon, Texas and
Washington. Prior to joining MFS, Mr. Callahan was Vice President and General
Manager, Southwest Division for Sprint. Mr. Callahan also held sales positions
with Data Switch and North American Telecom. Mr. Callahan was elected to the
Company's Board of Directors in March 1998.
Dana A. Crowne became the Company's Senior Vice President and Chief
Engineer in August 1997. Prior to joining Allegiance, Mr. Crowne held various
management positions at MFS from the time of its founding in 1988, where his
responsibilities included providing engineering support and overseeing budgets
for the construction of MFS' networks. Mr. Crowne ultimately became Vice
President, Network Optimization for MFS from January 1996 to May 1997 and
managed the company's network expenses and planning and its domestic engineering
functions. Prior to joining MFS, Mr. Crowne designed and installed fiber optic
transmission systems for Morrison-Knudsen and served as a consultant on the
construction of private telecommunications networks with JW Reed and Associates.
Stephen N. Holland joined the Company as its Senior Vice President and
Chief Information Officer in September 1997. Prior to that time, Mr. Holland
held several senior level positions involving management of or consulting on
information systems, accounting, taxation and finance. Mr. Holland's experience
includes serving as Practice Manager and Information Technology Consultant for
Oracle Corporation from June 1995 to September 1997, as Chief Financial Officer
of Petrosurance Casualty Co. from September 1992 to June 1995, as Manager of
Business Development for Electronic Data Systems, and as a partner of Price
Waterhouse. Mr. Holland's brother, Royce J. Holland, presently serves as the
Company's Chairman of the Board and Chief Executive Officer.
Patricia E. Koide has been the Company's Senior Vice President of Human
Resources, Real Estate, Facilities and Administration since August 1997. Before
then, Ms. Koide was Vice President of Corporate Services, Facilities and
Administration for WorldCom from March 1997 to August 1997. Ms. Koide also held
various management positions within MFS and its subsidiaries since 1989,
including Senior Vice President of Facilities, Administration and Purchasing for
MFS North America from 1996 to 1997, Senior Vice President of Human Resources,
Facilities and Administration for MFS Telecom from 1994 to 1996, and Vice
President of Human Resources and Administration for MFS North America from 1989
to 1993. Prior to MFS, Ms. Koide was with Sprint for eight years where she
managed the company's human resources, real estate and facilities for the
Midwest.
Gregg A. Long, who became the Company's Senior Vice President of Regulatory
and Development in September 1997, spent 11 years at Destec Energy, Inc. as
Project Development Manager, Vice President, and Director. In that position, he
was responsible for the development of gas-fired power plants from conceptual
stages through project financing. Prior to joining Destec, Mr. Long was Manager
of Project Finance at Morrison-Knudsen, where he was responsible for analyzing
and arranging finance packages for various industrial, mining and civil projects
and also served as financial consultant and analyst.
L.C. Baird, who became the Company's Regional Vice President -- Southeast
Division in September 1997, has more than 25 years of experience in the
telecommunications industry. Prior to joining Allegiance, Mr. Baird held several
senior level positions in operating units of MFS, including serving as President
of MFS Intelenet's Southern Division from January 1993 to April 1997 and as vice
president of sales and marketing for MFS Network Technologies from August 1987
to January 1993. Mr. Baird also served as area manager for Motorola's Latin
American Communications where he was responsible for sales in Central America,
Mexico, South America and the Caribbean.
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Anthony J. Parella, who joined the Company as its Regional Vice
President -- Central Division in August 1997, has more than 10 years of
experience in the telecommunications industry. Prior to joining Allegiance, Mr.
Parella was Vice President and General Manager for MFS Intelenet, Inc., an
operating unit of MFS, from February 1994 to January 1997, where he was
responsible for the company's sales and operations in Texas. Mr. Parella also
served as Director of Commercial Sales for Sprint from 1991 to January 1994.
Lawrence A. Price joined the Company as its Regional Vice
President -- Northeast Division in February, 1998. From February 1997 until he
joined the Company, Mr. Price was a Vice President/General Manager of WinStar
Telecommunications, Inc. From June 1995 to February 1997, Mr. Price held
management positions with ADC Telecommunications, Inc. From July 1994 to June
1995, he was the Director of U.S. Sales and Operations of ATX Telecom Systems,
Inc, and from July 1993 to July 1994 he was a sales manager with Teleport
Communications Group, Inc.
Paul D. Carbery, who was elected to the Company's Board of Directors in
August 1997, is a general partner of Frontenac Company, a Chicago-based private
equity investing firm, where he specializes in investing in companies in the
telecommunications and technology industries. Mr. Carbery also presently serves
on the boards of directors of Whittman Hart, Inc., a publicly traded information
services company, and Mastering Computers Inc., a publicly traded information
technology training company.
James E. Crawford, III, who was elected to the Company's Board of Directors
in August 1997, is a general partner of Frontenac Company, a Chicago-based
private equity investing firm, where he specializes in investing in companies in
the telecommunications and technology industries. Mr. Crawford also presently
serves on the boards of directors of Focal Communications Corporation ("Focal"),
a privately held CLEC that will compete with the Company, as well as of Optika,
a publicly held document imaging software company, and Cornerstone, a publicly
held document imaging displays company.
John B. Ehrenkranz, who was elected to the Company's Board of Directors in
March 1998, is a Principal of Morgan Stanley & Co. Incorporated where he has
been employed since 1987. Mr. Ehrenkranz is also a Principal of Morgan Stanley
Capital Partners III, Inc., the general partner of the general partner of
certain Fund Investors.
Paul J. Finnegan, who was elected to the Company's Board of Directors in
August 1997, is a vice president of Madison Dearborn Partners, Inc., a
Chicago-based private equity investing firm, where he specializes in investing
in companies in the telecommunications industry. Mr. Finnegan also presently
serves on the boards of directors of Focal, a privately held CLEC that will
compete with the Company, and Omnipoint Corporation, a publicly traded PCS
provider.
Richard D. Frisbie, who was elected to the Company's Board of Directors in
August 1997, is a Managing Partner of Battery Ventures, a Boston-based private
equity investing firm, where he specializes in investing in companies in the
telecommunications industry. Mr. Frisbie also presently serves on the boards of
directors of Focal and of XCOM Technologies, Inc., privately held CLECs that
will compete with the Company.
Reed E. Hundt was elected to the Company's Board of Directors in March
1998. Mr. Hundt served as chairman of the Federal Communications Commission from
1993 to 1997. He currently serves as chairman of The Forum on Communications and
Society (FOCAS) at The Aspen Institute. Prior to joining the FCC, Mr. Hundt was
a partner at Latham & Watkins, an international law firm.
Robert H. Niehaus, who was elected to the Company's Board of Directors in
August 1997, is a Managing Director of Morgan Stanley & Co. Incorporated where
he has been employed since 1982. Mr. Niehaus also presently serves on the boards
of directors of numerous companies including American Italian Pasta Company,
Fort James Corporation, Silgan Holdings Inc., and Waterford Wedgewood, plc. Mr.
Niehaus is also a Managing Director and a Director of Morgan Stanley Capital
Partners III, Inc., the general partner of the general partner of certain Fund
Investors.
James N. Perry, Jr., who was elected to the Company's Board of Directors in
August 1997, is a vice president of Madison Dearborn Partners, Inc., a
Chicago-based private equity investing firm, where he specializes in investing
in companies in the telecommunications industry. Mr. Perry also presently serves
on the boards of directors of Focal, a privately held CLEC that will compete
with the Company, as well as
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Omnipoint Corporation, a publicly traded PCS provider, and Clearnet
Communications, a Canadian publicly traded PCS and enhanced specialized mobile
radio company.
ELECTION OF DIRECTORS; VOTING AGREEMENT
The Company's bylaws establish the size of the Company's Board of Directors
at 13 Directors; there is presently one vacancy. The Company's certificate of
incorporation and by-laws provide that its Directors will be appointed and may
be removed by majority vote of the Company's stockholders (without cumulative
voting).
At present, all directors are elected annually and serve until the next
annual meeting of stockholders, or until the election and qualification of their
successors. The current direct and indirect stockholders of the Company are
parties to a voting agreement, pursuant to which they have each agreed to vote
all of their shares in such a manner as to elect the following persons to serve
as Directors: Madison Dearborn Capital Partners, Morgan Stanley Capital
Partners, and Frontenac Company (and their respective successors, assigns,
transferees, and affiliates) each have the right to designate two Directors;
Battery Ventures (and its successors, assigns, transferees, and affiliates) has
the right to designate one Director; the Company's Chief Executive Officer has
the right to serve as a Director; the Management Investors (and their successors
and assigns) have the right to designate three Directors; and the final
directorship may be filled by a representative designated by the Fund Investors
and acceptable to the Management Investors.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors currently has three committees: (i) an Executive
Committee, (ii) an Audit Committee and (iii) a Compensation Committee.
The current direct and indirect stockholders of the Company are parties to
a voting agreement, pursuant to which they have agreed to vote all of their
shares in such a manner that the Executive Committee will comprise the Company's
Chief Executive Officer and three other representatives, one designated by each
of Morgan Stanley Capital Partners, Madison Dearborn Capital Partners, and
Frontenac Company (and their respective successors, assigns, transferees and
affiliates). The Executive Committee will be authorized, subject to certain
limitations, to exercise all of the powers of the Board of Directors during
periods between Board meetings.
The Audit Committee is currently comprised of Messrs. Yost, Hundt, Crawford
and Finnegan. The Audit Committee is responsible for making recommendations to
the Board of Directors regarding the selection of independent auditors,
reviewing the results and scope of the audit and other services provided by the
Company's independent accountants and reviewing and evaluating the Company's
audit and control functions.
The Compensation Committee is currently comprised of Messrs. Holland,
Frisbie, Crawford, Niehaus and Perry. The Compensation Committee is responsible
for reviewing, and as it deems appropriate, recommending to the Board of
Directors, policies, practices and procedures relating to the compensation of
the officers and other managerial employees of the Company and the establishment
and administration of employee benefit plans. The Compensation Committee
exercises all authority under any stock option or stock purchase plans of the
Company (unless the Board appoints any other committee to exercise such
authority), and advises and consults with the officers of the Company as may be
requested regarding managerial personnel policies.
COMPENSATION OF DIRECTORS
The Company will reimburse the members of its Board of Directors for their
reasonable out-of-pocket expenses incurred in connection with attending Company
Board or committee meetings. Additionally, the Company is obligated to maintain
its present level of directors' and officers' insurance. Members of the
Company's Board of Directors receive no other compensation for services provided
as a Director or as a member of any Board committee.
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EXECUTIVE COMPENSATION
The following table sets forth compensation paid during the period from
April 22, 1997 to December 31, 1997 to the Chief Executive Officer of the
Company (the "Named Executive Officer"). There were no other executive officers
of the Company whose annual salary and bonus exceeded $100,000 for all services
rendered to the Company during such period.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------------------------------------
OTHER ANNUAL ALL OTHER
COMPENSATION COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($)(A) ($)
--------------------------- ---- --------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Royce J. Holland................. 1997 $72,308 $ -- $ -- $ --
Chairman of the Board and Chief
Executive Officer
</TABLE>
- ---------------
(a) Includes perquisites and other benefits paid to the Named Executive Officer
in excess of 10% of the total annual salary and bonus received by the Named
Executive Officer during the last fiscal year.
Prior to April 1998, the Board did not have a Compensation Committee and
decisions concerning the compensation of executive officers and other key
employees of the Company were determined by the Company's Board of Directors.
During the Company's fiscal year ending December 31, 1998, Royce J. Holland, C.
Daniel Yost, Thomas M. Lord, and John J. Callahan expect to earn salaries at an
annual rate of $200,000, $200,000, $175,000, and $175,000, respectively.
STOCK PLANS
1997 NONQUALIFIED STOCK OPTION PLAN
On November 13, 1997, the Company's Board of Directors adopted the 1997
Nonqualified Stock Option Plan (the "Option Plan"), under which the Company may
issue to Directors, consultants, and executive and other key employees of the
Company, stock options (the "Options") exercisable for an aggregate of 5,000
shares of the Company's Common Stock (subject to adjustment in the Board's
discretion upon the occurrence of certain events that might otherwise lead to
the expansion or dilution of the rights of participants under the Option Plan).
The Option Plan is administered by the Compensation Committee. The Option Plan
authorizes the Compensation Committee to issue Options in such forms and amounts
and on such terms as determined by the Compensation Committee. The per-share
exercise price for Options will be set by the Compensation Committee, but may
not be less than the fair market value of a share of the Company's Common Stock
on the date of grant (as determined in good faith by the Compensation
Committee). The Compensation Committee currently intends to issue Options under
the Option Plan to all Company employees other than the Management Investors,
and to set the number of Options issued as an annual component of an employee's
compensation package. The terms of the Options issued under the Option Plan to
date are, and the Compensation Committee presently anticipates that the terms of
all Options issued under the Option Plan in the future will be, as summarized
below.
The Company will establish an annual amount of Options to be granted to an
employee each year. Three years' amount of Options will be issued on the first
business day of the quarter succeeding the date which a participant joins the
Company. Such Options will vest over a three-year period, with 1/3 "cliff"
vesting on the first anniversary of the date of grant and 1/12 vesting on each
of the first eight quarter-ends thereafter. Subject to available Options under
the Option Plan, one year's amount of Options will be issued on each anniversary
of the initial grant, and such Options will vest in the third year after grant,
with 1/4 vesting on each of the 27-, 30-, 33-, and 36-month anniversaries of the
date of grant. Through this mechanism, a participant will at any given time have
three years' amount of Options unvested. Vesting is accelerated 100% upon an
employee's death or permanent physical disability. If there is a sale of the
Company and the participant is terminated (or
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constructively terminated) within the two-year period following the sale,
vesting is accelerated 100% upon such termination. Options expire if not
exercised within six years after the date of grant. If a participant is
terminated for any reason prior to a public offering of the Company's securities
(an "IPO") or a sale of the Company, all unexercised (both vested and unvested)
Options expire. If a participant is terminated for any reason after an IPO or a
sale of the Company, all unvested Options immediately expire and all vested
Options must be exercised within 90 days after termination. If a participant is
terminated for any reason prior to an IPO or a sale of the Company, the Company
may repurchase all Options and shares issued upon exercise of Options for
original cost (or, if the participant is terminated for cause, at the lesser of
fair market value and cost). Options are nontransferable during the life of the
participant. Shares of Common Stock issued upon exercise of Options are subject
to various restrictions on transferability, holdback periods in the event of an
IPO or other public offering of the Company's securities, provisions requiring
the holder of such shares to approve an IPO approved by the Board and provisions
requiring the holder of such shares to approve and, if requested by the Company,
sell its shares in any sale of the Company that is approved by the Board.
1998 STOCK INCENTIVE PLAN
Contingent upon and prior to the consummation of a public offering of the
Company's Common Stock, the Board and stockholders of the Company will approve
the Company's 1998 Stock Incentive Plan (the "1998 Stock Plan"). The 1998 Stock
Plan will be administered by the Compensation Committee, who will be appointed
by the Board. Certain employees, advisors and consultants of the Company will be
eligible to participate in the 1998 Stock Plan (a "Participant"). The
Compensation Committee will be authorized under the 1998 Stock Plan to select
the Participants and determine the terms and conditions of the awards under the
1998 Stock Plan. The 1998 Stock Plan provides for the issuance of the following
types of incentive awards: stock options, stock appreciation rights, restricted
stock, performance grants and other types of awards that the Compensation
Committee deems consistent with the purposes of the 1998 Stock Plan.
Options granted under the 1998 Stock Plan may be either incentive stock
options ("ISOs") or such other forms of non-qualified stock options ("NQOs") as
the Compensation Committee may determine. ISOs are intended to qualify as
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"). The exercise price of (i) an ISO
granted to an individual who owns shares possessing more than 10% of the total
combined voting power of all classes of stock of the Company (a "10% Owner")
will be at least 110% of the fair market value of a share of Common Stock on the
date of grant and (ii) an ISO granted to an individual other than a 10% Owner
and NQO will be at least 100% of the fair market value of a share of Common
Stock on the date of grant.
Options granted under the 1998 Stock Plan may be subject to time vesting
and certain other restrictions at the sole discretion of the Compensation
Committee. Subject to certain exceptions, the right to exercise an option
generally will terminate at the earlier of (i) the first date on which the
initial grantee of such option is not employed by the Company for any reason
other than termination without cause, death or permanent disability or (ii) the
expiration date of the option. If the holder of an option dies or suffers a
permanent disability while still employed by the Company, the right to exercise
all unexpired installments of such option shall be accelerated and shall vest as
of the latest of the date of such death, the date of such permanent disability
and the date of the discovery of such permanent disability, and such option
shall be exercisable, subject to certain exceptions, for 180 days after such
date. If the holder of an option is terminated without cause, to the extent the
option has vested, such option will be exercisable for 30 days after such date.
All outstanding awards under the 1998 Stock Plan will terminate immediately
prior to consummation of a liquidation or dissolution of the Company, unless
otherwise provided by the Board. In the event of the sale of all or
substantially all of the assets of the Company or the merger of the Company with
another corporation, all restrictions on any outstanding awards will terminate
and Participants will be entitled to the full benefit of their awards
immediately prior to the closing date of such sale or merger, unless otherwise
provided by the Board.
The Board generally will have the power and authority to amend the 1998
Stock Plan at any time without approval of the Company's stockholders, subject
to applicable federal securities, stock exchange and tax laws limitations.
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STOCK PURCHASE PLAN
The Company's Employee Stock Discount Purchase Plan (the "Stock Purchase
Plan") will be approved by the Board and stockholders contingent upon and prior
to the consummation of a public offering of the Company's Common Stock. The
Stock Purchase Plan is intended to give employees desiring to do so a convenient
means of purchasing shares of Common Stock through payroll deductions. The Stock
Purchase Plan is intended to provide an incentive to participate by permitting
purchases at a discounted price. The Company believes that ownership of stock by
employees will foster greater employee interest in the success, growth and
development of the Company.
Subject to certain restrictions, each employee of the Company who is a U.S.
resident or a U.S. citizen temporarily on location at a facility outside of the
United States will be eligible to participate in the Stock Purchase Plan if he
or she has been employed by the Company for more than six months. Participation
will be discretionary with each eligible employee. Elections to participate and
purchases of stock will be made on a quarterly basis. Each participating
employee contributes to the Stock Purchase Plan by choosing a payroll deduction
in any specified amount, with a specified minimum deduction per payroll period.
A participating employee may increase or decrease the amount of such employee's
payroll deduction, including a change to a zero deduction as of the beginning of
any calendar quarter. Elected contributions will be credited to participants'
accounts at the end of each calendar quarter. In addition, employees may make
lump sum contributions at the end of the year to enable them to purchase the
maximum number of shares available for purchase during the plan year.
Each participating employee's contributions will be used to purchase shares
for the employee's share account within 15 days after the last day of each
calendar quarter. The cost per share will be 85% of the lower of the public
closing price of the Company's Common Stock on the first or the last day of the
calendar quarter. The number of shares purchased on each employee's behalf and
deposited in his/her share account will be based on the amount accumulated in
such participant's cash account and the purchase price for shares with respect
to any calendar quarter. Shares purchased under the Stock Purchase Plan carry
full rights to receive dividends declared from time to time. Under the Stock
Purchase Plan, any dividends attributable to shares in the employee's share
account will be automatically used to purchase additional shares for such
employee's share account. Share distributions and share splits will be credited
to the participating employee's share account as of the record date and
effective date, respectively. A participating employee will have full ownership
of all shares in such employee's share account and may withdraw them for sale or
otherwise by written request to the Compensation Committee following the close
of each calendar quarter. Subject to applicable federal securities and tax laws,
the Board will have the right to amend or to terminate the Stock Purchase Plan.
Amendments to the Stock Purchase Plan will not affect a participating employee's
right to the benefit of the contributions made by such employee prior to the
date of any such amendment. In the event the Stock Purchase Plan is terminated,
the Compensation Committee will be required to distribute all shares held in
each participating employee's share account plus an amount of cash equal to the
balance in each participating employee's cash account.
401(K) PLAN
The Company is in the process of adopting a tax-qualified employee savings
and retirement plan (the "401(k) Plan") covering all of the Company's full-time
employees. Pursuant to the 401(k) Plan, employees may elect to reduce their
current compensation up to the statutorily prescribed annual limit and have the
amount of such reduction contributed to the 401(k) Plan. The 401(k) Plan is
intended to qualify under Section 401 of the Code so that contributions by
employees to the 401(k) Plan, and income earned on plan contributions, are not
taxable to employees until withdrawn from the 401(k) Plan. The trustees under
the 401(k) Plan at the direction of each participant, invest such participant's
assets in the 401(k) Plan in selected investment options.
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EXECUTIVE AGREEMENTS
Royce J. Holland Executive Agreement
In August 1997, in connection with Royce J. Holland's purchase of an
ownership interest in Allegiance LLC, the Company's sole shareholder (see
"Certain Relationships and Related Transactions" and "Security Ownership of
Certain Beneficial Owners and Management"), the Company, Allegiance LLC, and Mr.
Holland entered into an Executive Purchase Agreement (the "Holland Executive
Agreement"), including, among others, the following terms:
Vesting. The Allegiance LLC securities purchased by Mr. Holland, as well as
any Company securities distributed with respect to such Allegiance LLC
securities (collectively, the "Holland Executive Securities") are subject to
vesting over a four-year period, with 20.0% vesting on the date of grant and
20.0% vesting on each of the first four anniversaries thereof. Vesting would be
accelerated by one year upon an IPO (which would include the Equity Offering),
100.0% in the event of Mr. Holland's death or disability, and 100.0% upon a sale
of the Company where at least 50.0% of the consideration for such sale is cash
or marketable securities.
Repurchase of Securities. If Mr. Holland's employment is terminated for any
reason other than a termination by the Company without cause, Allegiance LLC and
the Company (or their assignees) will have the right to repurchase all vested
Holland Executive Securities at fair market value, and all unvested Holland
Executive Securities at the lesser of fair market value and original cost.
Restrictions on Transfer; Holdback and "Drag Along" Agreements. The Holland
Executive Securities are subject to various restrictions on transferability,
holdback periods in the event of an IPO (which would include the Equity
Offering) or other public offering of the Company's securities, provisions
requiring the holder of such shares to approve an IPO approved by the Board and
provisions requiring the holder of such shares to approve and, if requested by
the Company, sell its shares in any sale of the Company that is approved by the
Board.
Terms of Employment. Mr. Holland is an "at will" employee of the Company
and, thus, may be terminated by the Company at any time and for any reason. Mr.
Holland is not entitled to receive any severance payments upon any such
termination, other than payments in consideration of the noncompetition and
nonsolicitation agreements discussed below.
Noncompetition and Nonsolicitation Agreements. During the Noncompete Period
(as defined below), Mr. Holland may not hire or attempt to induce any employee
of the Company to leave the Company's employ, nor attempt to induce any customer
or other business relation of the Company to cease doing business with the
Company, nor in any other way interfere with the Company's relationships with
its employees, customers, and other business relations. Also, during the
Noncompete Period, Mr. Holland may not participate in any business engaged in
the provision of telecommunications services in any Covered Market. As used in
the Holland Executive Agreement, the "Noncompete Period" means the period of
employment and the following additional period: (i) if Mr. Holland is terminated
prior to August 13, 2000, the period ending on the later of August 13, 2001 and
the second anniversary of termination; (ii) if Mr. Holland is terminated at any
time on or after August 13, 2000 but prior to August 13, 2001, the period ending
on August 13, 2002; and (iii) if Mr. Holland is terminated at any time on or
after August 13, 2001, the one-year period following termination; provided that
the "Noncompete Period" shall end if at any time the Company ceases to pay Mr.
Holland his base salary and benefits in existence at the time of termination
(reduced by any salary or benefits Mr. Holland receives as a result of other
employment). As used in the Holland Executive Agreement, "Covered Market" means:
(i) any market in which the Company is conducting business or preparing,
pursuant to a business plan approved by the Board of Directors and the Fund
Investors, to conduct business; (ii) Dallas, New York City, Atlanta, Chicago,
Los Angeles and 15 additional Phase I and Phase II markets; and (iii) any market
for which the Company has prepared a business plan unless such business plan has
been rejected by the Board of Directors or the Fund Investors.
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C. Daniel Yost Executive Agreement
In February 1998, in connection with C. Daniel Yost's purchase of an
ownership interest in Allegiance LLC, the Company's sole shareholder (see
"Certain Relationships and Related Transactions" and "Security Ownership of
Certain Beneficial Owners and Management"), the Company, Allegiance LLC, and Mr.
Yost entered into an Executive Purchase Agreement, containing the same terms as
the Holland Executive Agreement described above.
Thomas M. Lord Executive Agreement
In August 1997, in connection with Thomas M. Lord's purchase of an
ownership interest in Allegiance LLC, the Company's sole shareholder (see
"Certain Relationships and Related Transactions" and "Security Ownership of
Certain Beneficial Owners and Management"), the Company, Allegiance LLC, and Mr.
Lord entered into an Executive Purchase Agreement, containing the same terms as
the Holland Executive Agreement described above.
Executive Agreements Entered into by Other Management Investors
Each of the Management Investors has entered into an Executive Purchase
Agreement (the "Other Executive Agreements"), including, among others, the
following terms:
Vesting. The Allegiance LLC securities purchased by a Management Investor,
as well as any Company securities distributed with respect to such Allegiance
LLC securities (collectively, the "Executive Securities") are subject to vesting
over a four-year period, with 25.0% vesting on each of the first four
anniversaries of the grant date. Vesting would be accelerated by one year upon
an IPO (which would include the Equity Offering), 100.0% in the event of such
Management Investor's death or disability, and 100.0% upon a sale of the Company
where at least 50.0% of the consideration for such sale is cash or marketable
securities.
Repurchase of Securities. If a Management Investor's employment is
terminated for any reason, Allegiance LLC and the Company (or their assignees)
will have the right to repurchase all such Management Investor's vested
Executive Securities at fair market value, and all unvested Executive Securities
at the lesser of fair market value and original cost.
Restrictions on Transfer; Holdback and "Drag Along" Agreements. The
Executive Securities are subject to various restrictions on transferability,
holdback periods in the event of an IPO or other public offering of the
Company's securities, provisions requiring the holder of such shares to approve
an IPO approved by the Board and provisions requiring the holder of such shares
to approve and, if requested by the Company, sell its shares in any sale of the
Company that is approved by the Board.
Terms of Employment. Each Management Investor is an "at will" employee of
the Company and, thus, may be terminated by the Company at any time and for any
reason. No Management Investor is entitled to receive any severance payments
upon any such termination.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to April 1998, the Company did not have a Compensation Committee and
the compensation of executive officers and other key employees of the Company
was determined by the Company's Board of Directors. Royce J. Holland, the
Company's Chairman and Chief Executive Officer, Thomas M. Lord, the Company's
Executive Vice President of Corporate Development and Chief Financial Officer,
C. Daniel Yost, the Company's President and Chief Operating Officer, and John J.
Callahan, the Company's Senior Vice President of Sales and Marketing, are all
currently members of the Company's Board of Directors. The Board of Directors
established the Compensation Committee, which is responsible for decisions
regarding salaries, incentive compensation, stock option grants and other
matters regarding executive officers and key employees of the Company. See
"-- Committees of the Board of Directors."
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
STOCK PURCHASE AGREEMENT
On August 13, 1997, Allegiance LLC and the Company entered into a stock
purchase agreement (the "Stock Purchase Agreement") including, among others, the
following terms:
Purchase of Preferred Stock. Allegiance LLC purchased 95,000 shares of the
Company's Preferred Stock for an aggregate purchase price of $5 million and a
commitment to make capital contributions to the Company of up to an additional
$95 million on the terms and conditions discussed in "-- Subsequent Capital
Contributions." For a description of the terms of the Preferred Stock, see
"Description of Capital Stock -- Preferred Stock."
Subsequent Capital Contributions. The Company may at any time require
Allegiance LLC to make subsequent capital contributions to the Company, up to an
aggregate amount of $95 million (approximately $45 million of which will have
been drawn down after giving effect to the Equity Contributions), so long as at
the time of the drawdown such amounts are contemplated by Approved Business
Plans (as defined below) of the Company and certain other closing conditions are
satisfied (including the absence of a material breach or default by the Company
under its contractual obligations and the absence of a material adverse change
in the business, financial condition, operations, assets, or business prospects
of the Company as a whole). For purposes of the Stock Purchase Agreement, an
"Approved Business Plan" means a business plan prepared by the Company's
management describing proposed business activities in a target market and the
capital requirements to pre-fund such market to Positive Free Cash Flow (a
"Business Plan") that has been approved by the Company's Board of Directors and
the Fund Investors; provided that an "Approved Business Plan" will cease to be
such during any period in which the actual results of operations or other
factors applicable to that market substantially deviate (in the good faith
judgment of Allegiance LLC) from the Company's estimates and projections in such
Business Plan or in Company annual budgets based on such Business Plan and
approved by the Board of Directors and the Fund Investors. Under this mechanism,
once the Board of Directors and the Fund Investors have approved a Business Plan
relating to a targeted market, Allegiance LLC is essentially to fund capital
requirements for such market to Positive Free Cash Flow unless the Company is in
material breach or default of its contractual obligations, there is a
substantial deviation in the results of that market, or there has occurred a
material adverse change affecting the Company as a whole. The Board of Directors
and the Fund Investors have approved, and initial required funding has been made
under, Business Plans relating to the Dallas-Fort Worth, Atlanta, New York
City-Long Island-Northern New Jersey, Chicago, Los Angeles, San Francisco and
Boston markets. The Company's initial equity financing of approximately $50.1
million has been provided to fund the Company's start-up costs and ongoing
network development in these markets.
Restrictive Covenants. Allegiance LLC has the power (which power is
exercised by the Fund Investors) to approve the Company's taking or agreeing to
take certain actions, including, among other things (i) declaring dividends on,
redeeming or issuing any equity securities, any securities convertible into or
exercisable for equity securities, or any debt with equity features, (ii)
loaning monies, (iii) disposing of significant assets, (iv) making acquisitions,
(v) entering into affiliated transactions, (vi) incurring significant
indebtedness, and (vii) entering into or modifying any employment arrangement
with senior management. Allegiance LLC has approved the Company's consummation
of the Lease Facility and the Offering.
Preemptive Rights. Allegiance LLC and its equity holders have the right to
participate pro rata in any issuance of Common Stock (or securities convertible
into or exercisable for Common Stock), other than issuances upon conversion of
Preferred Stock or exercise of Options, as part of financing an acquisition, or
in an IPO.
LIMITED LIABILITY COMPANY AGREEMENT
On August 13, 1997, the Fund Investors and the Management Investors entered
into a limited liability company agreement (the "LLC Agreement") in order to
govern the affairs of Allegiance LLC, which presently holds the one outstanding
share of the Company's Common Stock and substantially all of the
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outstanding shares of the Company's Preferred Stock. The LLC Agreement includes,
among others, the following terms:
Capital Structure. The LLC Agreement authorizes the issuance of (i)
95,000,000 Class A Units, (ii) 5,000,000 Class B Units, and (iii) certain other
Units issuable in limited circumstances.
Capital Contributions. The Fund Investors purchased 95,000,000 Class A Unit
interests in Allegiance LLC, and 5,000,000 Class B Unit interests in Allegiance
LLC were purchased by Management Investors (or reserved for issuance to Company
managers as they join the Company). The Fund Investors and the Management
Investors are required to fund Allegiance LLC's capital contribution obligations
under the Stock Purchase Agreement in proportion to the respective number of
Units held by each of them. If any holder of Units fails to make a capital
contribution when due, Allegiance LLC may (in addition to its other legal or
equitable rights) repurchase such defaulting Unitholder's equity interest for an
amount equal to such Unitholder's capital contributions to the date of
repurchase (including interest at the prime rate), payable in the form of
Allegiance LLC Units that are subordinated in right of payment to the return of
capital (including interest thereon at a rate of 12% per annum) to Allegiance
LLC's other Unitholders.
Allocations and Distributions. Upon an IPO, sale of the Company, or
liquidation or dissolution of the Company (a "Liquidity Event"), Allegiance LLC
will dissolve and its assets (which are expected to consist almost entirely of
Company stock) will be distributed up to the Fund Investors and the Management
Investors in accordance with a final allocation calculated immediately prior to
such dissolution. The final allocation between the Fund Investors and the
Management Investors will range between 95.0%/5.0% and 66.7%/33.3% according to
certain multiple of invested capital and internal rate of return tests
calculated based upon the valuation of the Company's Common Stock implied by the
Liquidity Event. The Company expects that the Equity Offering, if consummated,
will result in a final allocation of 66.7% to the Fund Investors and 33.3% to
the Management Investors.
HOLLAND RIGHTS TO APPROVE IPO, SALE OF THE COMPANY, AND CERTAIN PRIVATE EQUITY
AND DEBT FINANCINGS.
So long as Royce J. Holland and his family continue to hold at least 90% of
the Holland Executive Securities: (i) the Company, Allegiance LLC, and the Fund
Investors and Management Investors may not approve or consummate an IPO or a
sale of the Company prior to August 13, 2000 without Mr. Holland's approval,
unless (x) such a transaction would result in a 66.7%/33.3% allocation between
the Fund Investors and the Management Investors under the LLC Agreement, or (y)
the Company has insufficient liquidity to fund its operations for a six-month
period and lacks any other adequate means of financing (including available
monies under the Equity Commitments); and (ii) the Company may not incur
additional private equity or debt financing (other than equipment financing,
indebtedness specified in an Approved Business Plan, or pursuant to an IPO)
prior to a Liquidity Event without Mr. Holland's approval, unless (x) the entire
Equity Commitments have been drawn down or (y) there has occurred a material
adverse change in the business, financial condition, operations, assets, or
business prospects of the Company as a whole. Mr. Holland has approved issuance
of the Notes offered hereby.
SECURITYHOLDERS AGREEMENT
The Fund Investors, the Management Investors, the Company, and Allegiance
LLC are parties to a securityholders agreement dated as of August 13, 1997 (the
"Securityholders Agreement"). Pursuant to the terms of the Securityholders
Agreement, the Fund Investors may not transfer their Allegiance LLC or Company
securities prior to August 13, 1998 other than to their affiliates or as part of
a sale of the Company. Sales by the Fund Investors after August 13, 1998 (other
than to affiliates or the public, or as part of a sale of the Company) are
subject to first refusal rights in favor of the other Fund Investors, and to the
"tag-along" rights of the Fund Investors (and, in connection with a
greater-than-50%-sale of the Fund Investors' securities, the Management
Investors with respect to their vested securities) to participate pro rata in
such sale. In the event of an approved sale of the Company, each of the Fund
Investors (and their transferees) agrees to approve and, if requested, sell its
shares in such sale of the Company. If a Liquidity Event has not occurred by
August 13, 2004, each Fund Investor and Management Investor will have the right
to require
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Allegiance LLC and the Company to take all actions necessary to purchase its
securities at the greater of fair market value and original cost plus accrued
dividends at 12% per annum. The Indenture limits the ability of the Company to
repurchase shares of Preferred Stock or Common Stock. In connection with the
Initial Offering, the Fund Investors and Management Investors have acknowledged
that the Indenture could restrict the Company from repurchasing their stock for
cash and agreed in writing that any claim for such payment would be subordinated
in right of payment to the Notes.
REGISTRATION RIGHTS AGREEMENT
The Fund Investors, the Management Investors, and the Company are parties
to a Registration Rights Agreement dated as of August 13, 1997. See "Description
of Capital Stock -- Registration Rights."
VOTING AGREEMENT
The current direct and indirect stockholders of the Company are parties to
a voting agreement, pursuant to which they have each agreed to vote all of their
shares in such a manner as to elect the following persons to serve as Directors:
Madison Dearborn Capital Partners, Morgan Stanley Capital Partners, and
Frontenac Company (and their respective successors, assigns, transferees, and
affiliates) each have the right to designate two Directors; Battery Ventures
(and its successors, assigns, transferees, and affiliates) has the right to
designate one Director; the Company's Chief Executive Officer has the right to
serve as a Director; the Management Investors (and their successors and assigns)
have the right to designate three Directors; and the final directorship may be
filled by a representative designated by the Fund Investors and acceptable to
the Management Investors.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company's outstanding capital stock consists of one share of Common
Stock and 95,641.25 shares of Preferred Stock. Substantially all of these shares
of capital stock are owned by Allegiance LLC. In addition, employees of the
Company own options to purchase Common Stock and the Company has reserved 5,000
shares of Common Stock for these and future employee options. The power of
Allegiance LLC to vote and dispose of the capital stock of the Company owned by
it is exercised by the board of managers of Allegiance LLC which is elected by
the holders of Allegiance LLC Class A and Class B Units. Thus, the holders of
these units could be deemed to be beneficial owners of the capital stock of the
Company owned by Allegiance LLC.
The following table sets forth certain information regarding the beneficial
ownership of the equity securities of Allegiance LLC by: (i) each of the
directors and the executive officers of the Company; (ii) all directors and
executive officers as a group and (iii) each owner of more than 5% of the equity
securities of Allegiance LLC ("5% Owners"). Unless otherwise noted, the address
for each director and executive officer of the Company is c/o the Company, 1950
Stemmons Freeway, Suite 3026, Dallas, Texas 75207. The address of Allegiance LLC
is c/o Madison Dearborn Partners Inc., Three First National Plaza, Suite 3800,
Chicago, IL 60602.
<TABLE>
<CAPTION>
ALLEGIANCE LLC
-----------------------------------------------------------
PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER CLASS A UNITS(1) CLASS B UNITS(1) CLASS A AND B UNITS
------------------------------------ ---------------- ---------------- -------------------
<S> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS:
Royce J. Holland(2)........................ -- 1,437,500 1.44
C. Daniel Yost............................. -- 600,000 0.60
Thomas M. Lord(3).......................... -- 675,000 0.68
John J. Callahan........................... -- 150,000 0.15
Paul D. Carbery(4)......................... 15,000,000 -- 15.00
James E. Crawford, III(4).................. 15,000,000 -- 15.00
John B. Ehrenkranz......................... -- -- --
Paul J. Finnegan(5)........................ -- -- --
Richard D. Frisbie(6)...................... 7,500,000 -- 7.50
Reed E. Hundt(7)........................... -- -- --
Robert H. Niehaus(8)....................... -- -- --
James N. Perry, Jr.(5)..................... -- -- --
All directors and executive officers as a
group (12 persons)....................... 37,500,000 2,862,500 40.37
5% OWNERS:
Madison Dearborn Capital Partners(9)....... 36,250,000 -- 36.25
Morgan Stanley Capital Partners(10)........ 36,250,000 -- 36.25
Frontenac Company(11)...................... 15,000,000 -- 15.00
Battery Ventures(12)....................... 7,500,000 -- 7.50
</TABLE>
- ---------------
(1) The Class A Units of Allegiance LLC have been issued to the Fund Investors
in Allegiance LLC and the Class B Units have been issued to the Management
Investors. These units require ongoing proportionate capital contributions
but provide for different distributions depending upon the value of the
Company at the time of certain liquidity events. See "Certain Relationships
and Related Transactions."
(2) Includes 718,750 Class B Units owned by the Royce J. Holland Family Limited
Partnership, of which Royce J. Holland is the sole general partner. All of
the Class B Units owned by Mr. Holland and the Royce J. Holland Family
Limited Partnership are subject to vesting, with 20% of such Class B Units
vested on August 13, 1997 and an additional 20% vesting on each of the
first four anniversaries of such date. See "Management -- Executive
Agreements."
(3) Includes 337,500 Class B Units owned by Mr. Lord's wife and children, as to
which Mr. Lord disclaims beneficial ownership. All of the Class B Units
owned by Mr. Lord and his family are subject to vesting with 20% of such
Class B Units vested on August 13, 1997 and an additional 20% vesting on
each of the first four anniversaries of such date. See
"Management -- Executive Agreements."
(4) All Class A Units shown are owned by Frontenac VII, L.P. Messrs. Carbery
and Crawford are general partners of Frontenac Company, the general partner
of Frontenac VII, L.P. and their address is c/o Frontenac Company, 135 S.
LaSalle Street, Suite 3800, Chicago, IL 60603. They disclaim beneficial
ownership of these Class A Units.
(5) Messrs. Finnegan and Perry are vice presidents of Madison Dearborn
Partners, Inc., the general partner of the general partner of Madison
Dearborn Capital Partners II, L.P. and their address is c/o Madison
Dearborn Partners, Inc., Three First National Plaza, Suite 3800, Chicago,
IL 60602.
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(6) All Class A Units shown are owned by Battery Ventures, IV, L.P. and Battery
Investment Partners IV, LLC. Mr. Frisbie is a managing partner of Battery
Ventures, the general partner of these funds and his address is c/o Battery
Ventures, 20 William Street, Wellesley, MA 02181. He disclaims beneficial
ownership of these Class A Units.
(7) Mr. Hundt owns options to acquire .002375 shares of Common Stock and
Charles Ross Partners, LLC, a Delaware limited liability company, of which
Mr. Hundt is a member owns 118.75 shares of the Company's Preferred Stock.
(8) Mr. Niehaus is a managing director and director of Morgan Stanley Capital
Partners III, Inc., the general partner of the general partner of these
funds and their address is c/o Morgan Stanley Capital Partners, 1221 Avenue
of the Americas, New York, NY 10020.
(9) These Class A Units are owned by Madison Dearborn Capital Partners II, L.P.
(10) These Class A Units are owned by Morgan Stanley Capital Partners III, L.P.,
MSCP III 892 Investors, L.P. and Morgan Stanley Capital Investors, L.P.
(11) These Class A Units are owned by Frontenac VII, L.P.
(12) These Class A Units are owned by Battery Ventures, IV, L.P. and Battery
Investment Partners IV, LLC.
DESCRIPTION OF CERTAIN INDEBTEDNESS
AT&T LEASE FACILITY
The Company is in discussions with AT&T Capital regarding obtaining up to
an aggregate of $100.0 million of lease financing pursuant to the Lease Facility
for the acquisition of digital switches, software, electronics and associated
transmission equipment by certain of the Company's subsidiaries. It is currently
anticipated that the Lease Facility would have a term of approximately one year
and would allow the Company's subsidiaries to finance the purchase of such
equipment (plus an additional amount of up to 15% of such equipment costs) on an
as needed basis. As currently proposed, each lease entered into under the Lease
Facility would have a term of seven and one-half years, with payments to be made
on a quarterly basis. The interest rate for the Lease Facility has not been
determined. Each lease would be secured by the equipment acquired and thus the
Notes would be effectively subordinated to amounts outstanding under the Lease
Facility. In addition, the Company could be required to guarantee all amounts
outstanding under the Lease Facility. It is currently expected that upon
consummation of the Lease Facility, the Company would be required to pay a
commitment fee no greater than 1.5% of the aggregate amount available and that
the Company would be required to pay non-utilization fees no greater than .25%
of any unused funds upon both the six-month anniversary and the expiration date
of the Lease Facility.
If the Company elects to pursue implementation of the Lease Facility, such
implementation will be subject to the satisfaction of a number of conditions,
including the completion of the negotiation of such definitive terms and
conditions, completion of due diligence and receipt of AT&T Capital internal
approvals.
DEBT OFFERING
The Company intends as soon as practicable, subject to market conditions,
to offer an aggregate principal amount at maturity of Senior Discount Notes due
2008 sufficient to raise approximately $200 million of gross proceeds (the
"Anticipated Notes"). See "Prospectus Summary -- Financing Plan."
The Anticipated Notes are currently expected to be unsubordinated,
unsecured indebtedness of the company, ranking pari passu in right of payment
with all unsubordinated, unsecured indebtedness of the Company, including the
Notes, and would rank senior in right of payment to all subordinated
indebtedness of the Company.
The Anticipated Notes are expected to have substantially similar terms as
the Notes, including with respect to interest payment and optional redemption.
The indenture relating to the Anticipated Notes is currently expected to contain
certain restrictive covenants similar in scope to those contained in the
Indenture, including among others, limitations on the ability of the Company and
its restricted subsidiaries to incur indebtedness, pay dividends, prepay
subordinated indebtedness, repurchase capital stock, make investments, engage in
transactions with affiliates, create liens, sell assets and engage in mergers
and consolidations.
There can be no assurance that the Company will consummate the Debt
Offering, or that it will be consummated in accordance with the terms identified
herein. In addition, the closing of the Debt Offering will be conditioned upon
the closing of the Equity Offering, but the closing of the Equity Offering will
not be conditioned upon the closing of the Debt Offering.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Old Notes were originally sold by the Company on February 3, 1998 to
the Initial Purchasers pursuant to the Purchase Agreement. The Initial
Purchasers subsequently resold the Old Notes to qualified institutional buyers
in reliance on Rule 144A under the Securities Act and qualified buyers outside
the United States in reliance upon Regulation S under the Securities Act. As a
condition to the Purchase Agreement, the Company entered into the Notes
Registration Rights Agreement with the Initial Purchasers pursuant to which the
Company has agreed, for the benefit of the holders of the Old Notes, at the
Company's cost, to use its best efforts to file and cause to become effective
the Exchange Offer Registration Statement and unless the Exchange Offer would
not be permitted by applicable law or Commission policy, commence the Exchange
Offer and use their best efforts to issue the New Notes in exchange for the Old
Notes on or prior to the date that is six months after the date of the original
issuance of the Old Notes. Upon the Exchange Offer Registration Statement being
declared effective, the Company will offer the New Notes in exchange for
surrender of the Old Notes. The Company will keep the Exchange Offer open for
not less than 20 business days (or longer if required by applicable law) after
the date on which notice of the Exchange Offer is mailed to the holders of the
Old Notes. For each Old Note surrendered to the Company pursuant to the Exchange
Offer, the holder of such Old Note will receive a New Note having a principal
amount equal to that of the surrendered Old Note.
Under existing interpretations of the staff of the Commission contained in
several no-action letters to third parties, the New Notes will, in general, be
freely tradeable after the Exchange Offer without further registration under the
Securities Act. However, any purchaser of Old Notes who is an "affiliate" (as
defined in the Securities Act) of the Company or who intends to participate in
the Exchange Offer for the purpose of distributing the New Notes (i) will not be
able to rely on the interpretation of the staff of the Commission, (ii) will not
be able to tender its Old Notes in the Exchange Offer and (iii) must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with any sale or transfer of the Old Notes, unless such sale or
transfer is made pursuant to an exemption from such requirements.
As contemplated by these no-action letters and the Notes Registration
Rights Agreement, each holder accepting the Exchange Offer is required to
represent to the Company in the Letter of Transmittal that (i) the New Notes are
to be acquired by the holder or the person receiving such New Notes, whether or
not such person is the holder, in the ordinary course of business, (ii) the
holder or any such other person (other than a broker-dealer referred to in the
next sentence) is not engaging and does not intend to engage, in distribution of
the New Notes, (iii) the holder or any such other person has no arrangement or
understanding with any person to participate in the distribution of the New
Notes, (iv) neither the holder nor any such other person is an "affiliate" of
the Company within the meaning of Rule 405 under the Securities Act, and (v) the
holder or any such other person acknowledges that if such holder or any other
person participates in the Exchange Offer for the purpose of distributing the
New Notes it must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale of the New
Notes and cannot rely on those no-action letters. As indicated above, each
Participating Broker-Dealer that receives an New Note for its own account in
exchange for Old Notes must acknowledge that it (i) acquired the Old Notes for
its own account as a result of market-making activities or other trading
activities, (ii) has not entered into any arrangement or understanding with the
Company or any "affiliate" of the Company (within the meaning of Rule 405 under
the Securities Act) to distribute the New Notes to be received in the Exchange
Offer and (iii) will deliver a prospectus meeting the requirements of the
Securities Act in connection with any resale of such New Notes. For a
description of the procedures for resales by Participating Broker-Dealers, see
"Plan of Distribution."
In the event that applicable interpretations of the staff of the Commission
do not permit the Company to effect the Exchange Offer, or under certain other
circumstances, the Company will at its sole expense, (a) as promptly as
practicable, file a shelf registration statement covering resales of the Notes
(a "Shelf Registration Statement"), (b) use its reasonable best efforts to cause
such Shelf Registration Statement to be declared effective under the Securities
Act and (c) use its reasonable best efforts to keep effective such Shelf
Registration Statement until the earlier of two years after the Issue Date and
such time as all of the applicable
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Notes have been sold thereunder. The Company will, in the event of the filing of
a Shelf Registration Statement, provide to each holder of the Old Notes copies
of the prospectus which is a part of such Shelf Registration Statement, notify
each such holder when such Shelf Registration Statement has become effective and
take certain other actions as are required to permit unrestricted resales of the
Notes. A holder that sells its Notes pursuant to a Shelf Registration Statement
generally will be required to be named as a selling security holder in the
related prospectus and to deliver a prospectus to purchasers, will be subject to
certain of the civil liability provisions under the Securities Act in connection
with such sales and will be bound by the provisions of the Notes Registration
Rights Agreement which are applicable to such holder (including certain
indemnification obligations).
In the event that the Exchange Offer is not consummated or a Shelf
Registration Statement is not declared effective on or prior to the date that is
six months after the date of the original issuance of the Old Notes, interest
(in addition to the accrual of original issue discount during the period ending
February 15, 2003 and in addition to interest otherwise due on the Notes after
such date) will accrue, at the rate of .5% per annum of the Accreted Value on
the preceding Semi-Annual Accrual Date (as defined herein), on the Notes and be
payable in cash semi-annually on February 15 and August 15 of each year,
commencing February 15, 1999, until the Exchange Offer is consummated or the
Shelf Registration Statement is declared effective.
Holders of the Old Notes will be required to make certain representations
to the Company (as described in the Notes Registration Rights Agreement) in
order to participate in the Exchange Offer and will be required to deliver
information to be used in connection with the Shelf Registration Statement and
to provide comments on the Shelf Registration Statement within the time periods
set forth in the Notes Registration Rights Agreement in order to have their Old
Notes included in the Shelf Registration Statement and benefit from the
provisions regarding additional interest set forth above.
The summary herein of certain provisions of the Notes Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by, all the provisions of the Notes Registration Rights Agreement,
a copy of which is filed as an exhibit to the Exchange Offer Registration
Statement of which this Prospectus is a part.
Following the consummation of the Exchange Offer, holders of the Old Notes
who were eligible to participate in the Exchange Offer but who did not tender
their Old Notes will not have any further registration rights and such Old Notes
will continue to be subject to certain restrictions on transfer. Accordingly,
the liquidity of the market for such Old Notes could be adversely affected.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Old Notes
validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on
the Expiration Date. The Company will issue $1,000 principal amount at maturity
of New Notes in exchange for each $1,000 principal amount at maturity of
outstanding Old Notes accepted in the Exchange Offer. Holders may tender some or
all of their Old Notes pursuant to the Exchange Offer. However, Old Notes may be
tendered only in integral multiples of $1,000 principal amount at maturity.
The form and terms of the New Notes are the same as the form and terms of
the Old Notes except that (i) the New Notes bear a Series B designation and a
different CUSIP Number from the Old Notes, (ii) the New Notes have been
registered under the Securities Act and hence will not bear legends restricting
the transfer thereof and (iii) the holders of the New Notes will not be entitled
to certain rights under the Notes Registration Rights Agreement, including the
provisions providing for liquidated damages in certain circumstances relating to
the timing of the Exchange Offer, all of which rights will terminate when the
Exchange Offer is terminated. The New Notes will evidence the same debt as the
Old Notes and will be entitled to the benefits of the Indenture.
As of the date of this Prospectus, $445,000,000 aggregate principal amount
at maturity of Old Notes were outstanding. The Company has fixed the close of
business on , 1998 as the record date for the
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Exchange Offer for purposes of determining the persons to whom this Prospectus
and the Letter of Transmittal will be mailed initially.
Holders of Old Notes do not have any appraisal or dissenters' rights under
the General Corporation Law of Delaware, or the Indenture in connection with the
Exchange Offer. The Company intends to conduct the Exchange Offer in accordance
with the applicable requirements of the Exchange Act and the rules and
regulations of the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
for the purpose of receiving the New Notes from the Company.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, the certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering holder thereof as promptly as practicable
after the Expiration Date.
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than transfer taxes in certain circumstances, in connection with the
exchange fees and expenses.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
, 1998, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will mail to the registered
holders an announcement thereof, each prior to 9:00 a.m., New York City time, on
the next business day after the previously scheduled expiration date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Notes, to extend the Exchange Offer or to terminate the
Exchange Offer if any of the conditions set forth below under "Conditions" shall
not have been satisfied, by giving oral or written notice of such delay,
extension or termination to the Exchange Agent or (ii) to amend the terms of the
Exchange Offer in any manner. Any such delay in acceptance, extension,
termination or amendment will be followed as promptly as practicable by oral or
written notice thereof to the registered holders.
ACCRETION OF THE NOTES; INTEREST
The Old Notes will continue to accrete at the rate of 11 3/4% per annum to,
but excluding the date of issuance of the New Notes and will cease to accrete
upon cancellation of the Old Notes and issuance of the New Notes. Any Old Notes
not tendered or accepted for exchange will continue to accrete at the rate of
11 3/4% per annum in accordance with their terms. From and after the date of
issuance of the New Notes, the New Notes shall accrete at the rate of 11 3/4%
per annum, but no cash interest will be payable in respect of the New Notes
prior to August 15, 2003. From and after February 3, 2003, interest on the New
Notes will accrue on the principal amount at maturity at the rate of 11 3/4% per
annum and will be payable semi-annually on each February 15 and August 15,
commencing August 15, 2003.
PROCEDURES FOR TENDERING
Only a holder of Old Notes may tender such Old Notes in the Exchange Offer.
To tender in the Exchange Offer, a holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal or transmit an Agent's
Message in connection with a book-entry transfer, and mail or otherwise deliver
such Letter of Transmittal or such facsimile, or Agent's Message, together with
the Old Notes and any other required documents, to the
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<PAGE> 76
Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration Date.
To be tendered effectively, the Old Notes, Letter of Transmittal or an Agent's
Message and other required documents must be completed and received by the
Exchange Agent at the address set forth below under "Exchange Agent" prior to
5:00 p.m., New York City time, on the Expiration Date. Delivery of the Old Notes
may be made by book-entry transfer in accordance with the procedures described
below. Confirmation of such book-entry transfer must be received by the Exchange
Agent prior to the Expiration Date.
The term "Agent's Message" means a message, transmitted by a book-entry
transfer facility to, and received by, the Exchange Agent forming a part of a
confirmation of a book-entry, which states that such book-entry transfer
facility has received an express acknowledgment from the participant in such
book-entry transfer facility tendering the Old Notes that such participant has
received and agrees: (i) to participate in the Automated Tender Option Program
("ATOP"); (ii) to be bound by the terms of the Letter of Transmittal; and (iii)
that the Company may enforce such agreement against such participant.
By executing the Letter of Transmittal or Agent's Message, each holder will
make to the Company the representations set forth above in the third paragraph
under the heading "-- Purpose and Effect of the Exchange Offer."
The tender by a holder and the acceptance thereof by the Company will
constitute agreement between such holder and the Company in accordance with the
terms and subject to the conditions set forth herein and in the Letter of
Transmittal or Agent's Message.
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND SOLE RISK
OF THE HOLDER. AS AN ALTERNATIVE TO DELIVERY BY MAIL, HOLDERS MAY WISH TO
CONSIDER OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME
SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION
DATE. NO LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY.
HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST
COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Old Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct such
registered holder to tender on such beneficial owner's behalf. See "Instructions
to Registered Holder and/or Book-Entry Transfer Facility Participant from
Beneficial Owner" included with the Letter of Transmittal.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined herein)
unless the Old Notes tendered pursuant thereto are tendered (i) by a registered
holder who has not completed the box entitled "Special Registration
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or
(ii) for the account of an Eligible Institution. In the event that signatures on
a Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantee must be by a member firm of the
Medallion System (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered holder of any Old Notes listed therein, such Old Notes must be
endorsed or accompanied by a properly completed bond power, signed by such
registered holder as such registered holder's name appears on such Old Notes
with the signature thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, offices of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and evidence satisfactory to the
Company of their authority to so act must be submitted with the Letter of
Transmittal.
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<PAGE> 77
The Company understands that the Exchange Agent will make a request
promptly after the date of this Prospectus to establish accounts with respect to
the Old Notes at the Book-Entry Transfer Facility (as defined in the Letter of
Transmittal) for the purpose of facilitating the Exchange Offer, and subject to
the establishment thereof, any financial institution that is a participant in
the Book-Entry Transfer Facility's system may make book-entry delivery of Old
Notes by causing such Book-Entry Transfer Facility to transfer such Old Notes
into the Exchange Agent's account with respect to the Old Notes in accordance
with the Book-Entry Transfer Facility's procedures for such transfer. Although
delivery of the Old Notes may be effected through book-entry transfer into the
Exchange Agent's account at the Book-Entry Transfer Facility, unless an Agent's
Message is received by the Exchange Agent in compliance with ATOP, an
appropriate Letter of Transmittal properly completed and duly executed with any
required signature guarantee and all other required documents must in each case
be transmitted to and received or confirmed by the Exchange Agent at its address
set forth below on or prior to the Expiration Date, or, if the guaranteed
delivery procedures described below are complied with, within the time period
provided under such procedures. Delivery of documents to the Book-Entry Transfer
Facility does not constitute delivery to the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Old Notes and withdrawal of tendered Old Notes
will be determined by the Company in its sole discretion, which determination
will be final and binding. The Company reserves the absolute right to reject any
and all Old Notes not properly tendered or any Old Notes the Company's
acceptance of which would, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the right in its sole discretion to waive
any defects, irregularities or conditions of tender as to particular Old Notes.
The Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Notes must be cured within such time as the
Company shall determine. Although the Company intends to notify holders of
defects or irregularities with respect to tenders of Old Notes, neither the
Company, the Exchange Agent nor any other person shall incur any liability for
failure to give such notification. Tenders of Old Notes will not be deemed to
have been made until such defects or irregularities have been cured or waived.
Any Old Notes received by the Exchange Agent that are not properly tendered and
as to which the defects or irregularities have not been cured or waived will be
returned by the Exchange Agent to the tendering holders, unless otherwise
provided in the Letter of Transmittal, as soon as practicable following the
Expiration Date.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available, (ii) who cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent or (iii) who
cannot complete the procedures for book-entry transfer, prior to the Expiration
Date, may effect a tender if:
(a) the tender is made through an Eligible Institution,
(b) prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder, the certificate number(s)
of such Old Notes and the principal amount of Old Notes tendered, stating
that the tender is being made thereby and guaranteeing that, within five
New York Stock Exchange trading days after the Expiration Date, the Letter
of Transmittal (or facsimile thereof) together with the certificate(s)
representing the Old Notes (or a confirmation of book-entry transfer of
such Notes into the Exchange Agent's account at the Book-Entry Transfer
Facility), and any other documents required by the Letter of Transmittal
will be deposited by the Eligible Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (of
facsimile thereof), as well as the certificate(s) representing all tendered
Old Notes in proper form for transfer (or a confirmation of book-entry
transfer of such Old Notes into the Exchange Agent's account at the
Book-Entry Transfer
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<PAGE> 78
Facility), and all other documents required by the Letter of Transmittal
are received by the Exchange Agent within five New York Stock Exchange
trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Old Notes according to the guaranteed
delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date.
To withdraw a tender of Old Notes in the Exchange Offer, a telegram, telex,
letter or facsimile transmission notice of withdrawal must be received by the
Exchange Agent at its address set forth herein prior to 5:00 p.m., New York City
time, on the Expiration Date. Any such notice of withdrawal must (i) specify the
name of the person having deposited the Old Notes to be withdrawn (the
"Depositor"); (ii) identify the Old Notes to be withdrawn (including the
certificate number(s) and principal amount of such Old Notes, or, in the case of
Old Notes transferred by book-entry transfer, the name and number of the account
at the Book-Entry Transfer Facility to be credited); (iii) be signed by the
holder in the same manner as the original signature on the Letter of Transmittal
by which such Old Notes were tendered (including any required signature
guarantees) or be accompanied by documents of transfer sufficient to have the
Trustee with respect to the Old Notes register the transfer of such Old Notes
into the name of the person withdrawing the tender and (iv) specify the name in
which any such Old Notes are to be registered, if different from that of the
Depositor. All questions as to the validity, form and eligibility (including
time of receipt) of such notices will be determined by the Company, whose
determination shall be final and binding on all parties. Any Old Notes so
withdrawn will be deemed not to have been validly tendered for purposes of the
Exchange Offer and no New Notes will be issued with respect thereto unless the
Old Notes so withdrawn are validly retendered. Any Old Notes which have been
tendered but which are not accepted for exchange will be returned to the holder
thereof without cost to such holder as soon as practicable after withdrawal,
rejection of tender or termination of the Exchange Offer. Properly withdrawn Old
Notes may be retendered by following one of the procedures described above under
"-- Procedures for Tendering" at any time prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange New Notes for, any Old Notes,
and may terminate or amend the Exchange Offer as provided herein before the
acceptance of such Old Notes, if:
(a) any action or proceeding is instituted or threatened in any court
or by or before any governmental agency with respect to the Exchange Offer
which, in the reasonable judgment of the Company, might materially impair
the ability of the Company to proceed with the Exchange Offer or any
material adverse development has occurred in any existing action or
proceeding with respect to the Company, Holdings or any of their
subsidiaries; or
(b) any law, statute, rule, regulation or interpretation by the staff
of the Commission is proposed, adopted or enacted, which, in the reasonable
judgment of the Company, might materially impair the ability of the Company
to proceed with the Exchange Offer or materially impair the contemplated
benefits of the Exchange Offer to the Company; or
(c) any governmental approval has not been obtained, which approval
the Company shall, in its reasonable discretion, deem necessary for the
consummation of the Exchange Offer as contemplated hereby.
If the Company determines in its reasonable discretion that any of the
conditions are not satisfied, the Company may (i) refuse to accept any Old Notes
and return all tendered Old Notes to the tendering holders, (ii) extend the
Exchange Offer and retain all Old Notes tendered prior to the expiration of the
Exchange Offer, subject, however, to the rights of holders to withdraw such Old
Notes (see "-- Withdrawal of
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<PAGE> 79
Tenders") or (iii) waive such unsatisfied conditions with respect to the
Exchange Offer and accept all properly tendered Old Notes which have not been
withdrawn.
EXCHANGE AGENT
The Bank of New York has been appointed as Exchange Agent for the Exchange
Offer. Questions and requests for assistance, requests for additional copies of
this Prospectus or of the Letter of Transmittal and requests for Notice of
Guaranteed Delivery should be directed to the Exchange Agent addressed as
follows:
<TABLE>
<S> <C>
By Registered or Certified Mail: By Overnight Courier:
Attention: Reorganization Section-7-E
Attention: Reorganization Section-7-E The Bank of New York
The Bank of New York 101 Barclay Street, 7-E
101 Barclay Street, 7-E Corporate Trust Services Window
New York, NY 10286 Ground Level
By Hand: New York, NY 10286
Attention: Reorganization Section-7-E By Facsimile:
The Bank of New York (212) 815-6339
101 Barclay Street, 7-E Attention: Reorganization Section
Corporate Trust Services Window
Ground Level Confirm by telephone:
New York, NY 10286 (212) 815-2742
</TABLE>
Delivery to an address other than as set forth above, or transmission of
instructions via a facsimile number other than the one set forth above, will not
constitute a valid delivery.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telecopy, telephone or in person by officers and
regular employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers, or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company. Such expenses include fees and expenses of the Exchange
Agent and Trustee, accounting and legal fees and printing costs, among others.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes,
which is face value, as reflected in the Company's accounting records on the
date of exchange. Accordingly, no gain or loss for accounting purposes will be
recognized by the Company. The expenses of the Exchange Offer will be expensed
over the term of the New Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
The Old Notes that are not exchanged for New Notes pursuant to the Exchange
Offer will remain restricted securities. Accordingly, such Old Notes may be
resold only (i) to the Company (upon redemption thereof or otherwise), (ii) so
long as the Old Notes are eligible for resale pursuant to Rule 144A, to a person
inside the United States whom the seller reasonably believes is a qualified
institutional buyer within the meaning of Rule 144A under the Securities Act in
a transaction meeting the requirements of Rule 144A, in accordance with Rule 144
under the Securities Act, or pursuant to another exemption from the registration
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<PAGE> 80
requirements of the Securities Act (and based upon an opinion of counsel
reasonably acceptable to the Company), (iii) outside the United States to a
foreign person in a transaction meeting the requirements of Rule 904 under the
Securities Act, or (iv) pursuant to an effective registration statement under
the Securities Act, in each case in accordance with any applicable securities
laws of any state of the United States.
RESALE OF THE NEW NOTES
With respect to resales of New Notes, based on interpretations by the staff
of the Commission set forth in no-action letters issued to third parties, the
Company believes that a holder or other person who receives the New Notes,
whether or not such person is the holder (other than a person that is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) who receives New Notes in exchange for Old Notes in the ordinary course of
business and who is not participating, does not intend to participate, and has
no arrangement or understanding with any person to participate, in the
distribution of the New Notes, will be allowed to resell the New Notes to the
public without further registration under the Securities Act and without
delivering to the purchasers of the New Notes a prospectus that satisfies the
requirements of Section 10 of the Securities Act. However, if any holder
acquires New Notes in the Exchange Offer for the purpose of distributing or
participating in a distribution of the New Notes, such holder cannot rely on the
position of the staff of the Commission enunciated in such no-action letters or
any similar interpretive letters, and must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction, unless an exemption from registration is otherwise
available. Further, each Participating Broker-Dealer that receives New Notes for
its own account in exchange for Old Notes, where such Old Notes were acquired by
such Participating Broker-Dealer as a result of market-making activities or
other trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes.
As contemplated by these no-action letters and the Notes Registration
Rights Agreement, each holder accepting the Exchange Offer is required to
represent to the Company in the Letter of Transmittal that (i) the New Notes are
to be acquired by the holder or the person receiving such New Notes, whether or
not such person is the holder, in the ordinary course of business, (ii) the
holder or any such other person (other than a broker-dealer referred to in the
next sentence) is not engaging and does not intend to engage, in the
distribution of the New Notes, (iii) the holder or any such other person has no
arrangement or understanding with any person to participate in the distribution
of the New Notes, (iv) neither the holder nor any such other person is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act, and (v) the holder or any such other person acknowledges that if such
holder or other person participates in the Exchange Offer for the purpose of
distributing the New Notes it must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale of the
New Notes and cannot rely on those no-action letters. As indicated above, each
Participating Broker-Dealer that receives an New Note for its own account in
exchange for Old Notes must acknowledge that it will deliver a Prospectus in
connection with any resale of such New Notes. For a description of the
procedures for such resales by Participating Broker-Dealers, see "Plan of
Distribution."
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<PAGE> 81
DESCRIPTION OF THE NOTES
The Notes are to be issued under an Indenture, dated as of February 3,
1998, between the Company, as issuer, and The Bank of New York, as Trustee. The
terms of the New Notes include those stated in the Indenture and those made part
of the Indenture by reference to the Trust Indenture Act of 1939, as amended
(the "Trust Indenture Act") as in effect on the date of the Indenture. The form
and terms of the New Notes are the same as the form and terms of the Old Notes
(which they replace) except that (i) the New Notes bear a Series B designation,
(ii) the New Notes have been registered under the Securities Act and, therefore,
will not bear legends restricting the transfer thereof, and (iii) the holders of
New Notes will not be entitled to certain rights under the Notes Registration
Rights Agreement, including the provisions providing for liquidated damages in
certain circumstances relating to the timing of the Exchange Offer, which rights
will terminate when the Exchange Offer is consummated. The New Notes are subject
to all such terms, and holders of the New Notes are referred to the Indenture
and the Trust Indenture Act for a statement of them. The following is a summary
of the material terms and provisions of the New Notes. This summary does not
purport to be a complete description of the New Notes and is subject to the
detailed provisions of, and qualified in its entirety by reference to, the New
Notes and the Indenture (including the definitions contained therein). A copy of
the form of Indenture is filed as an exhibit to the Exchange Offer Registration
Statement of which this Prospectus forms a part. For definitions of certain
capitalized terms, see "-- Certain Definitions". Capitalized terms that are used
but not otherwise defined herein have the meanings assigned to them in the
Indenture. The Old Notes and the New Notes are sometimes referred to herein
collectively as the "Notes."
GENERAL
The Notes are unsecured unsubordinated obligations of the Company,
initially limited to $445,000,000 aggregate principal amount at maturity, and
will mature on February 15, 2008. Although for federal income tax purposes a
significant amount of original issue discount, taxable as ordinary income, will
be recognized by a Holder as such discount accrues from the issue date of the
Notes, no interest will be payable on the Notes prior to August 15, 2003. From
and after February 15, 2003, interest on the Notes will accrue at the rate of
11 3/4% from February 15, 2003 or from the most recent Interest Payment Date to
which interest has been paid or provided for, payable semiannually (to Holders
of record at the close of business on the February 1 or August 1 immediately
preceding the Interest Payment Date) on February 15 and August 15 of each year,
commencing August 15, 2003. Interest will be computed on the basis of a 360-day
year of twelve 30-day months.
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes may be exchanged or transferred, at the office or agency of the
Company in the Borough of Manhattan, the City of New York (which initially will
be the corporate trust office of the Trustee at One Wall Street, New York, New
York 10286); provided that, at the option of the Company, payment of interest
may be made by check mailed to the Holders at their addresses as they appear in
the Security Register.
The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 of principal amount at maturity and any integral
multiple thereof. No service charge will be made for any registration of
transfer or exchange of Notes, but the Company may require payment of a sum
sufficient to cover any transfer tax or other similar governmental charge
payable in connection therewith.
Subject to the covenants described below under "Covenants" and applicable
law, the Company may issue additional Notes under the Indenture. The Notes
offered hereby and any additional Notes subsequently issued would be treated as
a single class for all purposes under the Indenture.
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<PAGE> 82
OPTIONAL REDEMPTION
The Notes are redeemable, at the Company's option, in whole or in part, at
any time or from time to time, on or after February 15, 2003 and prior to
maturity, upon not less than 30 nor more than 60 days' prior notice mailed by
first class mail to each Holder's last address as it appears in the Security
Register, at the Redemption Prices (expressed in percentages of principal amount
at maturity) set forth below, plus accrued and unpaid interest, if any, to the
Redemption Date (subject to the right of Holders of record on the relevant
Regular Record Date that is on or prior to the Redemption Date to receive
interest due on an Interest Payment Date), if redeemed during the 12-month
period commencing February 15 of the years set forth below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
---- ----------------
<S> <C>
2003........................................................ 105.8750%
2004........................................................ 103.9167
2005........................................................ 101.9583
2006 and thereafter......................................... 100.0000
</TABLE>
In addition, at any time prior to February 15, 2001, the Company may redeem
up to 35% of the principal amount at maturity of the Notes originally issued
with the proceeds of one or more Public Equity Offerings following which there
is a Public Market, at any time or from time to time in part, at a Redemption
Price (expressed as a percentage of Accreted Value on the Redemption Date) of
111.75%; provided that at least $289,250,000 aggregate principal amount at
maturity of Notes remains outstanding after each such redemption.
Although the Company would have such redemption right in connection with
its currently contemplated Equity Offering, the Company currently intends to use
the proceeds from the Equity Offering to fund its business plan, and not to
redeem a portion of the Notes. See "Prospectus Summary -- Financing Plan."
In the case of any partial redemption, selection of the Notes for
redemption will be made by the Trustee in compliance with the requirements of
the principal national securities exchange, if any, on which the Notes are
listed or, if the Notes are not listed on a national securities exchange, by lot
or by such other method as the Trustee in its sole discretion shall deem to be
fair and appropriate; provided that no Note of $1,000 in principal amount at
maturity or less shall be redeemed in part. If any Note is to be redeemed in
part only, the notice of redemption relating to such Note shall state the
portion of the principal amount thereof to be redeemed. A new Note in principal
amount equal to the unredeemed portion thereof will be issued in the name of the
Holder thereof upon cancellation of the original Note.
SINKING FUND
There will be no sinking fund payments for the Notes.
RANKING
The Indebtedness evidenced by the Notes ranks pari passu in right of
payment with all existing and future unsubordinated indebtedness of the Company
and senior in right of payment to all subordinated indebtedness of the Company.
As of March 31, 1998, the Company and its subsidiaries had no indebtedness
outstanding other than the Notes. The Notes will be effectively subordinated to
such indebtedness to the extent of such security interests. In addition, all
existing and future liabilities (including trade payables) of the Company's
subsidiaries will be effectively senior to the Notes. See "Risk
Factors -- Holding Company Structure; Structural Subordination of Notes" and
"-- Effective Subordination of Notes to Secured Indebtedness."
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants and other provisions of the Indenture. Reference is made to the
Indenture for the definition of any other capitalized term used herein for which
no definition is provided.
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<PAGE> 83
"Accreted Value" means, for any Specified Date, the amount provided below
for each $1,000 principal amount at maturity of Notes:
(i) if the Specified Date occurs on one of the following dates (each a
"Semi-Annual Accrual Date"), the Accreted Value will equal the amount set
forth below for such Semi-Annual Accrual Date:
<TABLE>
<CAPTION>
SEMI-ANNUAL ACCRUAL DATE ACCRETED VALUE
------------------------ --------------
<S> <C>
August 15, 1998............................................. $ 598.21
February 15, 1999........................................... $ 633.36
August 15, 1999............................................. $ 670.57
February 15, 2000........................................... $ 709.96
August 15, 2000............................................. $ 751.67
February 15, 2001........................................... $ 795.84
August 15, 2001............................................. $ 842.59
February 15, 2002........................................... $ 892.09
August 15, 2002............................................. $ 944.51
February 15, 2003........................................... $1,000.00
</TABLE>
(ii) if the Specified Date occurs before the first Semi-Annual Accrual
Date, the Accreted Value will equal the sum of (a) $562.87 and (b) an
amount equal to the product of (1) the Accreted Value for the first
Semi-Annual Accrual Date less $562.87 multiplied by (2) a fraction, the
numerator of which is the number of days from the Closing Date to the
Specified Date, using a 360-day year of twelve 30-day months, and the
denominator of which is the number of days from the Closing Date to the
first Semi-Annual Accrual Date, using a 360-day year of twelve 30-day
months;
(iii) if the Specified Date occurs between two Semi-Annual Accrual
Dates, the Accreted Value will equal the sum of (a) the Accreted Value for
the Semi-Annual Accrual Date immediately preceding such Specified Date and
(b) an amount equal to the product of (1) the Accreted Value for the
immediately following Semi-Annual Accrual Date less the Accreted Value for
the immediately preceding Semi-Annual Accrual Date multiplied by (2) a
fraction, the numerator of which is the number of days from the immediately
preceding Semi-Annual Accrual Date to the Specified Date, using a 360-day
year of twelve 30-day months, and the denominator of which is 180; or
(iv) if the Specified Date occurs after the last Semi-Annual Accrual
Date, the Accreted Value will equal $1,000.
"Acquired Indebtedness" means Indebtedness of a Person existing at the time
such Person becomes a Restricted Subsidiary or assumed in connection with an
Asset Acquisition by a Restricted Subsidiary and not Incurred in connection
with, or in anticipation of, such Person becoming a Restricted Subsidiary or
such Asset Acquisition.
"Adjusted Consolidated Net Income" means, for any period, the aggregate net
income (or loss) of the Company and its Restricted Subsidiaries for such period
determined in conformity with GAAP; provided that the following items shall be
excluded in computing Adjusted Consolidated Net Income (without duplication):
(i) the net income (or loss) of any Person that is not a Restricted Subsidiary,
except (x) with respect to net income, to the extent of the amount of dividends
or other distributions actually paid to the Company or any of its Restricted
Subsidiaries by such Person during such period and (y) with respect to net
losses, to the extent of the amount of Investments made by the Company or any
Restricted Subsidiary in such Person during such period; (ii) solely for the
purposes of calculating the amount of Restricted Payments that may be made
pursuant to clause (C) of the first paragraph of the "Limitation on Restricted
Payments" covenant described below (and in such case, except to the extent
includable pursuant to clause (i) above), the net income (or loss) of any Person
accrued prior to the date it becomes a Restricted Subsidiary or is merged into
or consolidated with the Company or any of its Restricted Subsidiaries or all or
substantially all of the property and assets of such Person are acquired by the
Company or any of its Restricted Subsidiaries; (iii) the net income of any
Restricted Subsidiary to the extent that the declaration or payment of dividends
or similar
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<PAGE> 84
distributions by such Restricted Subsidiary of such net income is not at the
time permitted by the operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental regulation
applicable to such Restricted Subsidiary; (iv) any gains or losses (on an
after-tax basis) attributable to Asset Sales; (v) except for purposes of
calculating the amount of Restricted Payments that may be made pursuant to
clause (C) of the first paragraph of the "Limitation on Restricted Payments"
covenant described below, any amount paid or accrued as dividends on Preferred
Stock of the Company or any Restricted Subsidiary owned by Persons other than
the Company and any of its Restricted Subsidiaries; (vi) all extraordinary gains
and extraordinary losses; and (vii) any compensation expense paid or payable
solely with Capital Stock (other than Disqualified Stock) of the Company or any
options, warrants or other rights to acquire Capital Stock (other than
Disqualified Stock) of the Company (including Capital Stock of the Company held
by Allegiance LLC).
"Adjusted Consolidated Net Tangible Assets" means the total amount of
assets of the Company and its Restricted Subsidiaries (less applicable
depreciation, amortization and other valuation reserves), except to the extent
resulting from write-ups of capital assets (excluding write-ups in connection
with accounting for acquisitions in conformity with GAAP), after deducting
therefrom (i) all current liabilities of the Company and its Restricted
Subsidiaries (excluding intercompany items) and (ii) all goodwill, trade names,
trademarks, patents, unamortized debt discount and expense and other like
intangibles, all as set forth on the most recent quarterly or annual
consolidated balance sheet of the Company and its Restricted Subsidiaries,
prepared in conformity with GAAP and filed with the Commission or provided to
the Trustee pursuant to the "Commission Reports and Reports to Holders"
covenant.
"Affiliate", as applied to any Person, any other Person directly or
indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as applied to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
"Asset Acquisition" means (i) an investment by the Company or any of its
Restricted Subsidiaries in any other Person pursuant to which such Person shall
become a Restricted Subsidiary or shall be merged into or consolidated with the
Company or any of its Restricted Subsidiaries; provided that such Person's
primary business is related, ancillary or complementary to the businesses of the
Company and its Restricted Subsidiaries on the date of such investment or (ii)
an acquisition by the Company or any of its Restricted Subsidiaries of the
property and assets of any Person other than the Company or any of its
Restricted Subsidiaries that constitute substantially all of a division or line
of business of such Person; provided that the property and assets acquired are
related, ancillary or complementary to the businesses of the Company and its
Restricted Subsidiaries on the date of such acquisition.
"Asset Disposition" means the sale or other disposition by the Company or
any of its Restricted Subsidiaries (other than to the Company or another
Restricted Subsidiary) of (i) all or substantially all of the Capital Stock of
any Restricted Subsidiary or (ii) all or substantially all of the assets that
constitute a division or line of business of the Company or any of its
Restricted Subsidiaries.
"Asset Sale" means any sale, transfer or other disposition (including by
way of merger, consolidation or sale-leaseback transaction) in one transaction
or a series of related transactions by the Company or any of its Restricted
Subsidiaries to any Person other than the Company or any of its Restricted
Subsidiaries of (i) all or any of the Capital Stock of any Restricted
Subsidiary, (ii) all or substantially all of the property and assets of an
operating unit or business of the Company or any of its Restricted Subsidiaries
or (iii) any other property and assets (other than the Capital Stock or other
Investment in an Unrestricted Subsidiary) of the Company or any of its
Restricted Subsidiaries outside the ordinary course of business of the Company
or such Restricted Subsidiary and, in each case, that is not governed by the
provisions of the Indenture applicable to mergers, consolidations and sales of
all or substantially all of the assets of the Company; provided that "Asset
Sale" shall not include (a) sales or other dispositions of inventory,
receivables and other current assets, (b) sales, transfers or other dispositions
of assets constituting a Restricted Payment permitted to be made under the
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"Limitation on Restricted Payments" covenant, (c) sales, transfers or other
dispositions of assets with a fair market value (as certified in an Officers'
Certificate) not in excess of $1 million in any transaction or series of related
transactions, or (d) sales or other dispositions of assets for consideration at
least equal to the fair market value of the assets sold or disposed of, to the
extent that the consideration received would constitute property or assets of
the kind described in clause (B) of the "Limitation on Asset Sales" covenant.
"Average Life" means, at any date of determination with respect to any debt
security, the quotient obtained by dividing (i) the sum of the products of (a)
the number of years from such date of determination to the dates of each
successive scheduled principal payment of such debt security and (b) the amount
of such principal payment by (ii) the sum of all such principal payments.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) in equity of such Person, whether outstanding on the
Closing Date or issued thereafter, including, without limitation, all Common
Stock and Preferred Stock.
"Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present value
of the rental obligations of such Person as lessee, in conformity with GAAP, is
required to be capitalized on the balance sheet of such Person.
"Capitalized Lease Obligations" means the discounted present value of the
rental obligations under a Capitalized Lease.
"Change of Control" means such time as (i) (a) prior to the occurrence of a
Public Market, a "person" or "group" (within the meaning of Sections 13(d) and
14(d)(2) of the Exchange Act) becomes the ultimate "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act) of Voting Stock representing a
greater percentage of the total voting power of the Voting Stock of (x)
Allegiance LLC, on a fully diluted basis, than is beneficially owned by the Fund
Investors on such date or (y) the Company, on a fully diluted basis, than is
beneficially owned by the Existing Stockholders on such date and (b) after the
occurrence of a Public Market, a "person" or "group" (within the meaning of
Sections 13(d) and 14(d)(2) of the Exchange Act) becomes the ultimate
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of more
than 35% of the total voting power of the Voting Stock of the Company on a fully
diluted basis and such ownership represents a greater percentage of the total
voting power of the Voting Stock of the Company, on a fully diluted basis, than
is held by the Existing Stockholders on such date; or (ii) individuals who on
the Closing Date constitute the Board of Directors (together with any new
directors (x) whose election by the Board of Directors or whose nomination by
the Board of Directors for election by the Company's stockholders was approved
by a vote of at least two-thirds of the members of the Board of Directors then
in office who either were members of the Board of Directors on the Closing Date
or whose election or nomination for election was previously so approved or (y)
so long as the Fund Investors and their Affiliates beneficially own a majority
of the Voting Stock of Allegiance LLC, whose election was approved by Allegiance
LLC) cease for any reason to constitute a majority of the members of the Board
of Directors then in office.
"Closing Date" means the date on which the Notes are originally issued
under the Indenture.
"Consolidated EBITDA" means, for any period, Adjusted Consolidated Net
Income for such period plus, to the extent such amount was deducted in
calculating such Adjusted Consolidated Net Income, (i) Consolidated Interest
Expense, (ii) income taxes (other than income taxes (either positive or
negative) attributable to extraordinary and non-recurring gains or losses or
sales of assets), (iii) depreciation expense, (iv) amortization expense and (v)
all other non-cash items reducing Adjusted Consolidated Net Income (other than
items that will require cash payments and for which an accrual or reserve is, or
is required by GAAP to be, made), less all non-cash items increasing Adjusted
Consolidated Net Income, all as determined on a consolidated basis for the
Company and its Restricted Subsidiaries in conformity with GAAP; provided that,
if any Restricted Subsidiary is not a Wholly Owned Restricted Subsidiary,
Consolidated EBITDA shall be reduced (to the extent not otherwise reduced in
accordance with GAAP) by an amount equal to (A) the amount of the Adjusted
Consolidated Net Income attributable to such Restricted Subsidiary multiplied by
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(B) the percentage ownership interest in the income of such Restricted
Subsidiary not owned on the last day of such period by the Company or any of its
Restricted Subsidiaries.
"Consolidated Interest Expense" means, for any period, the aggregate amount
of interest in respect of Indebtedness (including, without limitation,
amortization of original issue discount on any Indebtedness and the interest
portion of any deferred payment obligation, calculated in accordance with the
effective interest method of accounting; all commissions, discounts and other
fees and charges owed with respect to letters of credit and bankers' acceptance
financing; the net costs associated with Interest Rate Agreements; and
Indebtedness that is Guaranteed or secured by the Company or any of its
Restricted Subsidiaries) and all but the principal component of rentals in
respect of Capitalized Lease Obligations paid, accrued or scheduled to be paid
or to be accrued by the Company and its Restricted Subsidiaries during such
period; excluding, however, (i) any amount of such interest of any Restricted
Subsidiary if the net income of such Restricted Subsidiary is excluded in the
calculation of Adjusted Consolidated Net Income pursuant to clause (iii) of the
definition thereof (but only in the same proportion as the net income of such
Restricted Subsidiary is excluded from the calculation of Adjusted Consolidated
Net Income pursuant to clause (iii) of the definition thereof) and (ii) any
premiums, fees and expenses (and any amortization thereof) payable in connection
with the offering of the Units, all as determined on a consolidated basis
(without taking into account Unrestricted Subsidiaries) in conformity with GAAP.
"Consolidated Leverage Ratio" means, on any Transaction Date, the ratio of
(i) the aggregate amount of Indebtedness of the Company and its Restricted
Subsidiaries on a consolidated basis outstanding on such Transaction Date to
(ii) the aggregate amount of Consolidated EBITDA for the then most recent four
fiscal quarters for which financial statements of the Company have been filed
with the Commission or provided to the Trustee pursuant to the "Commission
Reports and Reports to Holders" covenant described below (such four fiscal
quarter period being the "Four Quarter Period"); provided that, in making the
foregoing calculation, (A) pro forma effect shall be given to any Indebtedness
to be Incurred or repaid on the Transaction Date; (B) pro forma effect shall be
given to Asset Dispositions and Asset Acquisitions (including giving pro forma
effect to the application of proceeds of any Asset Disposition) that occur from
the beginning of the Four Quarter Period through the Transaction Date (the
"Reference Period"), as if they had occurred and such proceeds had been applied
on the first day of such Reference Period; (C) pro forma effect shall be given
to asset dispositions and asset acquisitions (including giving pro forma effect
to the application of proceeds of any asset disposition) that have been made by
any Person that has become a Restricted Subsidiary or has been merged with or
into the Company or any Restricted Subsidiary during such Reference Period and
that would have constituted Asset Dispositions or Asset Acquisitions had such
transactions occurred when such Person was a Restricted Subsidiary as if such
asset dispositions or asset acquisitions were Asset Dispositions or Asset
Acquisitions that occurred on the first day of such Reference Period; provided
that to the extent that clause (B) or (C) of this sentence requires that pro
forma effect be given to an Asset Acquisition or Asset Disposition, such pro
forma calculation shall be based upon the four full fiscal quarters immediately
preceding the Transaction Date of the Person, or division or line of business of
the Person, that is acquired or disposed of for which financial information is
available; and (D) the aggregate amount of Indebtedness outstanding as of the
end of the Reference Period will be deemed to include the total amount of funds
outstanding and/or available on the Transaction Date under any revolving credit
or similar facilities of the Company or its Restricted Subsidiaries.
"Consolidated Net Worth" means, at any date of determination, stockholders'
equity as set forth on the most recently available quarterly or annual
consolidated balance sheet of the Company and its Restricted Subsidiaries (which
shall be as of a date not more than 90 days prior to the date of such
computation, and which shall not take into account Unrestricted Subsidiaries),
less any amounts attributable to Disqualified Stock or any equity security
convertible into or exchangeable for Indebtedness, the cost of treasury stock
and the principal amount of any promissory notes receivable from the sale of the
Capital Stock of the Company or any of its Restricted Subsidiaries, each item to
be determined in conformity with GAAP (excluding the effects of foreign currency
exchange adjustments under Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 52).
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"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means any class or series of Capital Stock of any
Person that by its terms or otherwise is (i) required to be redeemed prior to
the Stated Maturity of the Notes, (ii) redeemable at the option of the holder of
such class or series of Capital Stock at any time prior to the Stated Maturity
of the Notes or (iii) convertible into or exchangeable for Capital Stock
referred to in clause (i) or (ii) above or Indebtedness having a scheduled
maturity prior to the Stated Maturity of the Notes; provided that any Capital
Stock that would not constitute Disqualified Stock but for provisions thereof
giving holders thereof the right to require such Person to repurchase or redeem
such Capital Stock upon the occurrence of an "asset sale" or "change of control"
occurring prior to the Stated Maturity of the Notes shall not constitute
Disqualified Stock if the "asset sale" or "change of control" provisions
applicable to such Capital Stock are no more favorable to the holders of such
Capital Stock than the provisions contained in "Limitation on Asset Sales" and
"Repurchase of Notes upon a Change of Control" covenants described below and
such Capital Stock, or the agreements or instruments governing the redemption
rights thereof, specifically provides that such Person will not repurchase or
redeem any such stock pursuant to such provision prior to the Company's
repurchase of such Notes as are required to be repurchased pursuant to the
"Limitation on Asset Sales" and "Repurchase of Notes upon a Change of Control"
covenants described below.
"Existing Stockholders" means (i) Madison Dearborn Partners, Inc., Morgan
Stanley Capital Partners III, Inc., Frontenac Company, Battery Partners IV, L.P.
and Battery Investment Partners IV, LLC and their respective Affiliates (the
"Fund Investors") and (ii) Allegiance LLC, so long as the Fund Investors, in the
aggregate, beneficially own a majority of the Voting Stock of Allegiance LLC.
"fair market value" means the price that would be paid in an arm's-length
transaction between an informed and willing seller under no compulsion to sell
and an informed and willing buyer under no compulsion to buy, as determined in
good faith by the Board of Directors, whose determination shall be conclusive if
evidenced by a Board Resolution; provided that for purposes of clause (viii) of
the second paragraph of the "Limitation on Indebtedness" covenant, (x) the fair
market value of any security registered under the Exchange Act shall be the
average of the closing prices, regular way, of such security for the 20
consecutive trading days immediately preceding the sale of Capital Stock and (y)
in the event the aggregate fair market value of any other property (other than
cash or cash equivalents) received by the Company exceeds $10 million, the fair
market value of such property shall be determined by a nationally recognized
investment banking firm and set forth in their written opinion which shall be
delivered to the Trustee.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Closing Date, including, without limitation,
those set forth in the opinions and pronouncements of the Accounting Principles
Board of the American Institute of Certified Public Accountants and statements
and pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession. All ratios and computations contained or referred to in
the Indenture shall be computed in conformity with GAAP applied on a consistent
basis, except that calculations made for purposes of determining compliance with
the terms of the covenants and with other provisions of the Indenture shall be
made without giving effect to (i) the amortization of any expenses incurred in
connection with the offering of the Units and (ii) except as otherwise provided,
the amortization of any amounts required or permitted by Accounting Principles
Board Opinion Nos. 16 and 17.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and,
without limiting the generality of the foregoing, any obligation, direct or
indirect, contingent or otherwise, of such Person (i) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Indebtedness of
such other Person (whether arising by virtue of partnership arrangements, or by
agreements to keep-well, to purchase assets, goods, securities or services
(unless such purchase arrangements are on arm's-length terms and are entered
into in the ordinary course of business), to take-or-pay, or to maintain
financial statement conditions or otherwise) or (ii) entered
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into for purposes of assuring in any other manner the obligee of such
Indebtedness of the payment thereof or to protect such obligee against loss in
respect thereof (in whole or in part); provided that the term "Guarantee" shall
not include endorsements for collection or deposit in the ordinary course of
business. The term "Guarantee" used as a verb has a corresponding meaning.
"Incur" means, with respect to any Indebtedness, to incur, create, issue,
assume, Guarantee or otherwise become liable for or with respect to, or become
responsible for, the payment of, contingently or otherwise, such Indebtedness,
including an "Incurrence" of Acquired Indebtedness; provided that neither the
accrual of interest nor the accretion of original issue discount shall be
considered an Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person at any date of
determination (without duplication), (i) all indebtedness of such Person for
borrowed money, (ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments, (iii) all obligations of such
Person in respect of letters of credit or other similar instruments (including
reimbursement obligations with respect thereto, but excluding obligations with
respect to letters of credit (including trade letters of credit) securing
obligations (other than obligations described in (i) or (ii) above or (v), (vi)
or (vii) below) entered into in the ordinary course of business of such Person
to the extent such letters of credit are not drawn upon or, if drawn upon, to
the extent such drawing is reimbursed no later than the third Business Day
following receipt by such Person of a demand for reimbursement), (iv) all
obligations of such Person to pay the deferred and unpaid purchase price of
property or services, which purchase price is due more than six months after the
date of placing such property in service or taking delivery and title thereto or
the completion of such services, except Trade Payables, (v) all Capitalized
Lease Obligations of such Person, (vi) all Indebtedness of other Persons secured
by a Lien on any asset of such Person, whether or not such Indebtedness is
assumed by such Person; provided that the amount of such Indebtedness shall be
the lesser of (A) the fair market value of such asset at such date of
determination and (B) the amount of such Indebtedness, (vii) all Indebtedness of
other Persons Guaranteed by such Person to the extent such Indebtedness is
Guaranteed by such Person and (viii) to the extent not otherwise included in
this definition, obligations under Currency Agreements and Interest Rate
Agreements. The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date (or, in the case of a revolving credit or other
similar facility, the total amount of funds outstanding and/or available on the
date of determination) of all unconditional obligations as described above and,
with respect to contingent obligations, the maximum liability upon the
occurrence of the contingency giving rise to the obligation, provided (A) that
the amount outstanding at any time of any Indebtedness issued with original
issue discount is the face amount of such Indebtedness less the remaining
unamortized portion of the original issue discount of such Indebtedness at the
time of its issuance as determined in conformity with GAAP, (B) that money
borrowed and set aside at the time of the Incurrence of any Indebtedness in
order to prefund the payment of the interest on such Indebtedness shall not be
deemed to be "Indebtedness" so long as such money is held to secure the payment
of such interest and (C) that Indebtedness shall not include any liability for
federal, state, local or other taxes.
"Interest Rate Agreement" means any interest rate protection agreement,
interest rate future agreement, interest rate option agreement, interest rate
swap agreement, interest rate cap agreement, interest rate collar agreement,
interest rate hedge agreement, option or future contract or other similar
agreement or arrangement.
"Investment" in any Person means any direct or indirect advance, loan or
other extension of credit (including, without limitation, by way of Guarantee or
similar arrangement; but excluding advances to customers in the ordinary course
of business that are, in conformity with GAAP, recorded as accounts receivable
on the balance sheet of the Company or its Restricted Subsidiaries) or capital
contribution to (by means of any transfer of cash or other property to others or
any payment for property or services for the account or use of others), or any
purchase or acquisition of Capital Stock, bonds, notes, debentures or other
similar instruments issued by, such Person and shall include (i) the designation
of a Restricted Subsidiary as an Unrestricted Subsidiary and (ii) the fair
market value of the Capital Stock (or any other Investment), held by the Company
or any of its Restricted Subsidiaries, of (or in) any Person that has ceased to
be a Restricted Subsidiary, including without limitation, by reason of any
transaction permitted by clause (iii) of the "Limitation on the Issuance and
Sale of Capital Stock of Restricted Subsidiaries" covenant; provided that the
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fair market value of the Investment remaining in any Person that has ceased to
be a Restricted Subsidiary shall not exceed the aggregate amount of Investments
previously made in such Person valued at the time such Investments were made
less the net reduction of such Investments. For purposes of the definition of
"Unrestricted Subsidiary" and the "Limitation on Restricted Payments" covenant
described below, (i) "Investment" shall include the fair market value of the
assets (net of liabilities (other than liabilities to the Company or any of its
Restricted Subsidiaries)) of any Restricted Subsidiary at the time that such
Restricted Subsidiary is designated an Unrestricted Subsidiary, (ii) the fair
market value of the assets (net of liabilities (other than liabilities to the
Company or any of its Restricted Subsidiaries)) of any Unrestricted Subsidiary
at the time that such Unrestricted Subsidiary is designated a Restricted
Subsidiary shall be considered a reduction in outstanding Investments and (iii)
any property transferred to or from an Unrestricted Subsidiary shall be valued
at its fair market value at the time of such transfer.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including, without limitation, any conditional sale or other
title retention agreement or lease in the nature thereof or any agreement to
give any security interest).
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Cash Proceeds" means, (a) with respect to any Asset Sale, the proceeds
of such Asset Sale in the form of cash or cash equivalents, including payments
in respect of deferred payment obligations (to the extent corresponding to the
principal, but not interest, component thereof) when received in the form of
cash or cash equivalents (except to the extent such obligations are financed or
sold with recourse to the Company or any Restricted Subsidiary) and proceeds
from the conversion of other property received when converted to cash or cash
equivalents, net of (i) brokerage commissions and other fees and expenses
(including fees and expenses of counsel and investment bankers) related to such
Asset Sale, (ii) provisions for all taxes (whether or not such taxes will
actually be paid or are payable) as a result of such Asset Sale without regard
to the consolidated results of operations of the Company and its Restricted
Subsidiaries, taken as a whole, (iii) payments made to repay Indebtedness or any
other obligation outstanding at the time of such Asset Sale that either (A) is
secured by a Lien on the property or assets sold or (B) is required to be paid
as a result of such sale and (iv) appropriate amounts to be provided by the
Company or any Restricted Subsidiary as a reserve against any liabilities
associated with such Asset Sale, including, without limitation, pension and
other post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale, all as determined in conformity with GAAP and (b) with respect
to any issuance or sale of Capital Stock, the proceeds of such issuance or sale
in the form of cash or cash equivalents, including payments in respect of
deferred payment obligations (to the extent corresponding to the principal, but
not interest, component thereof) when received in the form of cash or cash
equivalents (except to the extent such obligations are financed or sold with
recourse to the Company or any Restricted Subsidiary) and proceeds from the
conversion of other property received when converted to cash or cash
equivalents, net of attorney's fees, accountants' fees, underwriters' or
placement agents' fees, discounts or commissions and brokerage, consultant and
other fees incurred in connection with such issuance or sale and net of taxes
paid or payable as a result thereof.
"Offer to Purchase" means an offer to purchase Notes by the Company from
the Holders commenced by mailing a notice to the Trustee and each Holder
stating: (i) the covenant pursuant to which the offer is being made and that all
Notes validly tendered will be accepted for payment on a pro rata basis; (ii)
the purchase price and the date of purchase (which shall be a Business Day no
earlier than 30 days nor later than 60 days from the date such notice is mailed)
(the "Payment Date"); (iii) that any Note not tendered will continue to accrue
interest (or original issue discount) pursuant to its terms; (iv) that, unless
the Company defaults in the payment of the purchase price, any Note accepted for
payment pursuant to the Offer to Purchase shall cease to accrue interest (or
original issue discount) on and after the Payment Date; (v) that Holders
electing to have a Note purchased pursuant to the Offer to Purchase will be
required to surrender the Note, together with the form entitled "Option of the
Holder to Elect Purchase" on the reverse side of the Note completed, to the
Paying Agent at the address specified in the notice prior to the close of
business on the Business Day immediately preceding the Payment Date; (vi) that
Holders will be entitled to withdraw their election if the Paying Agent
receives, not later than the close of business on the third Business Day
immediately preceding
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the Payment Date, a telegram, facsimile transmission or letter setting forth the
name of such Holder, the principal amount at maturity of Notes delivered for
purchase and a statement that such Holder is withdrawing his election to have
such Notes purchased; and (vii) that Holders whose Notes are being purchased
only in part will be issued new Notes equal in principal amount to the
unpurchased portion of the Notes surrendered; provided that each Note purchased
and each new Note issued shall be in a principal amount at maturity of $1,000 or
an integral multiple thereof. On the Payment Date, the Company shall (i) accept
for payment on a pro rata basis Notes or portions thereof tendered pursuant to
an Offer to Purchase; (ii) deposit with the Paying Agent money sufficient to pay
the purchase price of all Notes or portions thereof so accepted; and (iii)
deliver, or cause to be delivered, to the Trustee all Notes or portions thereof
so accepted together with an Officers' Certificate specifying the Notes or
portions thereof accepted for payment by the Company. The Paying Agent shall
promptly mail to the Holders of Notes so accepted payment in an amount equal to
the purchase price, and the Trustee shall promptly authenticate and mail to such
Holders a new Note equal in principal amount at maturity to any unpurchased
portion of the Note surrendered; provided that each Note purchased and each new
Note issued shall be in a principal amount at maturity of $1,000 or an integral
multiple thereof. The Company will publicly announce the results of an Offer to
Purchase as soon as practicable after the Payment Date. The Trustee shall act as
the Paying Agent for an Offer to Purchase. The Company will comply with Rule
14e-1 under the Exchange Act and any other securities laws and regulations
thereunder to the extent such laws and regulations are applicable, in the event
that the Company is required to repurchase Notes pursuant to an Offer to
Purchase.
"Permitted Investment" means (i) an Investment in the Company or a
Restricted Subsidiary or a Person which will, upon the making of such
Investment, become a Restricted Subsidiary or be merged or consolidated with or
into or transfer or convey all or substantially all its assets to, the Company
or a Restricted Subsidiary; provided that such person's primary business is
related, ancillary or complementary to the businesses of the Company and its
Restricted Subsidiaries on the date of such Investment; (ii) Temporary Cash
Investments; (iii) payroll, travel and similar advances to cover matters that
are expected at the time of such advances ultimately to be treated as expenses
in accordance with GAAP; (iv) stock, obligations or securities received in
satisfaction of judgments; (v) Investments in prepaid expenses, negotiable
instruments held for collection and lease, utility and worker's compensation,
performance and other similar deposits; (vi) Interest Rate Agreements and
Currency Agreements designed solely to protect the Company or its Restricted
Subsidiaries against fluctuations in interest rates or foreign currency exchange
rates; and (vii) loans or advances to officers or employees of the Company or
any Restricted Subsidiary that do not in the aggregate exceed $2 million at any
time outstanding.
"Permitted Liens" means (i) Liens for taxes, assessments, governmental
charges or claims that are being contested in good faith by appropriate legal
proceedings promptly instituted and diligently conducted and for which a reserve
or other appropriate provision, if any, as shall be required in conformity with
GAAP shall have been made; (ii) statutory and common law Liens of landlords and
carriers, warehousemen, mechanics, suppliers, materialmen, repairmen or other
similar Liens arising in the ordinary course of business and with respect to
amounts not yet delinquent or being contested in good faith by appropriate legal
proceedings promptly instituted and diligently conducted and for which a reserve
or other appropriate provision, if any, as shall be required in conformity with
GAAP shall have been made; (iii) Liens incurred or deposits made in the ordinary
course of business in connection with workers' compensation, unemployment
insurance and other types of social security; (iv) Liens incurred or deposits
made to secure the performance of tenders, bids, leases, statutory or regulatory
obligations, bankers' acceptances, surety and appeal bonds, government
contracts, performance and return-of-money bonds and other obligations of a
similar nature incurred in the ordinary course of business (exclusive of
obligations for the payment of borrowed money); (v) easements, rights-of-way,
municipal and zoning ordinances and similar charges, encumbrances, title defects
or other irregularities that do not materially interfere with the ordinary
course of business of the Company or any of its Restricted Subsidiaries; (vi)
Liens (including extensions and renewals thereof) upon real or personal property
acquired after the Closing Date; provided that (a) such Lien is created solely
for the purpose of securing Indebtedness Incurred, in accordance with the
"Limitation on Indebtedness" covenant described below, to finance the cost
(including the cost of design, development, acquisition, construction,
installation, improvement, transportation or integration) of the item of
property or assets subject thereto and such Lien is
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created prior to, at the time of or within six months after the later of the
acquisition, the completion of construction or the commencement of full
operation of such property, (b) the principal amount of the Indebtedness secured
by such Lien does not exceed 100% of such cost and (c) any such Lien shall not
extend to or cover any property or assets other than such item of property or
assets and any improvements on such item; (vii) leases or subleases granted to
others that do not materially interfere with the ordinary course of business of
the Company and its Restricted Subsidiaries, taken as a whole; (viii) Liens
encumbering property or assets under construction arising from progress or
partial payments by a customer of the Company or its Restricted Subsidiaries
relating to such property or assets; (ix) any interest or title of a lessor in
the property subject to any Capitalized Lease or operating lease; (x) Liens
arising from filing Uniform Commercial Code financing statements regarding
leases; (xi) Liens on property of, or on shares of Capital Stock or Indebtedness
of, any Person existing at the time such Person becomes, or becomes a part of,
any Restricted Subsidiary; provided that such Liens do not extend to or cover
any property or assets of the Company or any Restricted Subsidiary other than
the property or assets acquired; (xii) Liens in favor of the Company or any
Restricted Subsidiary; (xiii) Liens arising from the rendering of a final
judgment or order against the Company or any Restricted Subsidiary that does not
give rise to an Event of Default; (xiv) Liens securing reimbursement obligations
with respect to letters of credit that encumber documents and other property
relating to such letters of credit and the products and proceeds thereof; (xv)
Liens in favor of customs and revenue authorities arising as a matter of law to
secure payment of customs duties in connection with the importation of goods;
(xvi) Liens encumbering customary initial deposits and margin deposits, and
other Liens that are within the general parameters customary in the industry and
incurred in the ordinary course of business, in each case, securing Indebtedness
under Interest Rate Agreements and Currency Agreements and forward contracts,
options, future contracts, futures options or similar agreements or arrangements
designed solely to protect the Company or any of its Restricted Subsidiaries
from fluctuations in interest rates, currencies or the price of commodities;
(xvii) Liens arising out of conditional sale, title retention, consignment or
similar arrangements for the sale of goods entered into by the Company or any of
its Restricted Subsidiaries in the ordinary course of business in accordance
with the past practices of the Company and its Restricted Subsidiaries prior to
the Closing Date; (xviii) Liens on or sales of receivables; and (xix) Liens that
secure Indebtedness with an aggregate principal amount not in excess of $5
million at any time outstanding.
"Public Equity Offering" means an underwritten primary public offering of
Common Stock of the Company pursuant to an effective registration statement
under the Securities Act.
A "Public Market" shall be deemed to exist if (i) a Public Equity Offering
has been consummated and (ii) at least 15% of the total issued and outstanding
Common Stock of the Company immediately prior to the consummation of such Public
Equity Offering has been distributed by means of an effective registration
statement under the Securities Act or sales pursuant to Rule 144 under the
Securities Act.
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"Significant Subsidiary" means, at any date of determination, any
Restricted Subsidiary that, together with its Subsidiaries, (i) for the most
recent fiscal year of the Company, accounted for more than 10% of the
consolidated revenues of the Company and its Restricted Subsidiaries or (ii) as
of the end of such fiscal year, was the owner of more than 10% of the
consolidated assets of the Company and its Restricted Subsidiaries, all as set
forth on the most recently available consolidated financial statements of the
Company for such fiscal year.
"S&P" means Standard & Poor's Ratings Services and its successors.
"Specified Date" means any Redemption Date, any Payment Date for an Offer
to Purchase or any date on which the Notes first become due and payable after an
Event of Default.
"Stated Maturity" means, (i) with respect to any debt security, the date
specified in such debt security as the fixed date on which the final installment
of principal of such debt security is due and payable and (ii) with respect to
any scheduled installment of principal of or interest on any debt security, the
date specified in such debt security as the fixed date on which such installment
is due and payable.
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"Strategic Subordinated Indebtedness" means Indebtedness of the Company
Incurred to finance the acquisition of a Person engaged in a business that is
related, ancillary or complementary to the business conducted by the Company or
any of its Restricted Subsidiaries, which Indebtedness by its terms, or by the
terms of any agreement or instrument pursuant to which such Indebtedness is
Incurred, (i) is expressly made subordinate in right of payment to the Notes and
(ii) provides that no payment of principal, premium or interest on, or any other
payment with respect to, such Indebtedness may be made prior to the payment in
full of all of the Company's obligations under the Notes; provided that such
Indebtedness may provide for and be repaid at any time from the proceeds of a
capital contribution or the sale of Capital Stock (other than Disqualified
Stock) of the Company after the Incurrence of such Indebtedness.
"Subsidiary" means, with respect to any Person, any corporation,
association or other business entity of which more than 50% of the voting power
of the outstanding Voting Stock is owned, directly or indirectly, by such Person
and one or more other Subsidiaries of such Person.
"Temporary Cash Investment" means any of the following: (i) direct
obligations of the United States of America or any agency thereof or obligations
fully and unconditionally guaranteed by the United States of America or any
agency thereof, (ii) time deposit accounts, certificates of deposit and money
market deposits maturing within one year of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of the
United States of America, any state thereof or any foreign country recognized by
the United States of America, and which bank or trust company has capital,
surplus and undivided profits aggregating in excess of $50 million (or the
foreign currency equivalent thereof) and has outstanding debt which is rated "A"
(or such similar equivalent rating) or higher by at least one nationally
recognized statistical rating organization (as defined in Rule 436 under the
Securities Act) or any money-market fund sponsored by a registered broker dealer
or mutual fund distributor, (iii) repurchase obligations with a term of not more
than 30 days for underlying securities of the types described in clause (i)
above entered into with a bank meeting the qualifications described in clause
(ii) above, (iv) commercial paper, maturing not more than one year after the
date of acquisition, issued by a corporation (other than an Affiliate of the
Company) organized and in existence under the laws of the United States of
America, any state thereof or any foreign country recognized by the United
States of America with a rating at the time as of which any investment therein
is made of "P-1" (or higher) according to Moody's or "A-1" (or higher) according
to S&P, and (v) securities with maturities of six months or less from the date
of acquisition issued or fully and unconditionally guaranteed by any state,
commonwealth or territory of the United States of America, or by any political
subdivision or taxing authority thereof, and rated at least "A" by S&P or
Moody's.
"Trade Payables" means, with respect to any Person, any accounts payable or
any other indebtedness or monetary obligation to trade creditors created,
assumed or Guaranteed by such Person or any of its Subsidiaries arising in the
ordinary course of business in connection with the acquisition of goods or
services.
"Transaction Date" means, with respect to the Incurrence of any
Indebtedness by the Company or any of its Restricted Subsidiaries, the date such
Indebtedness is to be Incurred and, with respect to any Restricted Payment, the
date such Restricted Payment is to be made.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below; and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Restricted
Subsidiary (including any newly acquired or newly formed Subsidiary of the
Company) to be an Unrestricted Subsidiary unless such Subsidiary owns any
Capital Stock of, or owns or holds any Lien on any property of, the Company or
any Restricted Subsidiary; provided that (A) any Guarantee by the Company or any
Restricted Subsidiary of any Indebtedness of the Subsidiary being so designated
shall be deemed an "Incurrence" of such Indebtedness and an "Investment" by the
Company or such Restricted Subsidiary (or both, if applicable) at the time of
such designation; (B) either (I) the Subsidiary to be so designated has total
assets of $1,000 or less or (II) if such Subsidiary has assets greater than
$1,000, such designation would be permitted under the "Limitation on Restricted
Payments" covenant described below and (C) if applicable, the Incurrence of
Indebtedness and the Investment referred to in clause (A) of this proviso would
be permitted under the "Limitation on Indebtedness" and "Limitation on
Restricted Payments" covenants
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described below. The Board of Directors may designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided that (i) no Default or Event
of Default shall have occurred and be continuing at the time of or after giving
effect to such designation and (ii) all Liens and Indebtedness of such
Unrestricted Subsidiary outstanding immediately after such designation would, if
Incurred at such time, have been permitted to be Incurred (and shall be deemed
to have been Incurred) for all purposes of the Indenture. Any such designation
by the Board of Directors shall be evidenced to the Trustee by promptly filing
with the Trustee a copy of the Board Resolution giving effect to such
designation and an Officers' Certificate certifying that such designation
complied with the foregoing provisions.
"Voting Stock" means with respect to any Person, Capital Stock of any class
or kind ordinarily having the power to vote for the election of directors,
managers or other voting members of the governing body of such Person.
"Wholly Owned" means, with respect to any Subsidiary of any Person, the
ownership of all of the outstanding Capital Stock of such Subsidiary (other than
any director's qualifying shares or Investments by foreign nationals mandated by
applicable law) by such Person or one or more Wholly Owned Subsidiaries of such
Person.
COVENANTS
Limitation on Indebtedness
(a) The Company will not, and will not permit any of its Restricted
Subsidiaries to, Incur any Indebtedness (other than the Notes and Indebtedness
existing on the Closing Date); provided that the Company may Incur Indebtedness
if, after giving effect to the Incurrence of such Indebtedness and the receipt
and application of the proceeds therefrom, the Consolidated Leverage Ratio would
be greater than zero and less than 6:1.
Notwithstanding the foregoing, the Company and any Restricted Subsidiary
(except as specified below) may Incur each and all of the following: (i)
Indebtedness outstanding at any time in an aggregate principal amount not to
exceed $100 million, less any amount of such Indebtedness permanently repaid as
provided under the "Limitation on Asset Sales" covenant described below; (ii)
Indebtedness owed (A) to the Company evidenced by a promissory note or (B) to
any Restricted Subsidiary; provided that any event which results in any such
Restricted Subsidiary ceasing to be a Restricted Subsidiary or any subsequent
transfer of such Indebtedness (other than to the Company or another Restricted
Subsidiary) shall be deemed, in each case, to constitute an Incurrence of such
Indebtedness not permitted by this clause (ii); (iii) Indebtedness issued in
exchange for, or the net proceeds of which are used to refinance or refund, then
outstanding Indebtedness (other than Indebtedness Incurred under clause (i),
(ii), (iv), (vi), (viii) or (xi) of this paragraph) and any refinancings thereof
in an amount not to exceed the amount so refinanced or refunded (plus premiums,
accrued interest, fees and expenses); provided that Indebtedness the proceeds of
which are used to refinance or refund the Notes or Indebtedness that is pari
passu with, or subordinated in right of payment to, the Notes shall only be
permitted under this clause (iii) if (A) in case the Notes are refinanced in
part or the Indebtedness to be refinanced is pari passu with the Notes, such new
Indebtedness, by its terms or by the terms of any agreement or instrument
pursuant to which such new Indebtedness is outstanding, is expressly made pari
passu with, or subordinate in right of payment to, the remaining Notes, (B) in
case the Indebtedness to be refinanced is subordinated in right of payment to
the Notes, such new Indebtedness, by its terms or by the terms of any agreement
or instrument pursuant to which such new Indebtedness is issued or remains
outstanding, is expressly made subordinate in right of payment to the Notes at
least to the extent that the Indebtedness to be refinanced is subordinated to
the Notes and (C) such new Indebtedness, determined as of the date of Incurrence
of such new Indebtedness, does not mature prior to the Stated Maturity of the
Indebtedness to be refinanced or refunded, and the Average Life of such new
Indebtedness is at least equal to the remaining Average Life of the Indebtedness
to be refinanced or refunded; and provided further that in no event may
Indebtedness of the Company be refinanced by means of any Indebtedness of any
Restricted Subsidiary pursuant to this clause (iii); (iv) Indebtedness (A) in
respect of performance, surety or appeal bonds provided in the ordinary course
of business, (B) under Currency Agreements and Interest Rate
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Agreements; provided that such agreements (a) are designed solely to protect the
Company or its Restricted Subsidiaries against fluctuations in foreign currency
exchange rates or interest rates and (b) do not increase the Indebtedness of the
obligor outstanding at any time other than as a result of fluctuations in
foreign currency exchange rates or interest rates or by reason of fees,
indemnities and compensation payable thereunder; and (C) arising from agreements
providing for indemnification, adjustment of purchase price or similar
obligations, or from Guarantees or letters of credit, surety bonds or
performance bonds securing any obligations of the Company or any of its
Restricted Subsidiaries pursuant to such agreements, in any case Incurred in
connection with the disposition of any business, assets or Restricted Subsidiary
(other than Guarantees of Indebtedness Incurred by any Person acquiring all or
any portion of such business, assets or Restricted Subsidiary for the purpose of
financing such acquisition), in a principal amount not to exceed the gross
proceeds actually received by the Company or any Restricted Subsidiary in
connection with such disposition; (v) Indebtedness of the Company, to the extent
the net proceeds thereof are promptly (A) used to purchase Notes tendered in an
Offer to Purchase made as a result of a Change in Control or (B) deposited to
defease the Notes as described below under "Defeasance"; (vi) Guarantees of the
Notes and Guarantees of Indebtedness of the Company by any Restricted Subsidiary
provided the Guarantee of such Indebtedness is permitted by and made in
accordance with the "Limitation on Issuance of Guarantees by Restricted
Subsidiaries" covenant described below; (vii) Indebtedness (including
Guarantees) Incurred to finance the cost (including the cost of design,
development, acquisition, construction, installation, improvement,
transportation or integration) to acquire equipment, inventory or network assets
(including acquisitions by way of Capitalized Lease and acquisitions of the
Capital Stock of a Person that becomes a Restricted Subsidiary to the extent of
the fair market value of the equipment, inventory or network assets so acquired)
by the Company or a Restricted Subsidiary after the Closing Date; (viii)
Indebtedness of the Company not to exceed, at any one time outstanding, two
times (A) the Net Cash Proceeds received by the Company after the Closing Date
as a capital contribution or from the issuance and sale of its Capital Stock
(other than Disqualified Stock) to a Person that is not a Subsidiary of the
Company, to the extent (I) such capital contribution or Net Cash Proceeds have
not been used pursuant to clause (C)(2) of the first paragraph or clause (iii),
(iv), (vi) of (vii) of the second paragraph of the "Limitation on Restricted
Payments" covenant described below to make a Restricted Payment and (II) if such
capital contribution or Net Cash Proceeds are used to consummate a transaction
pursuant to which the Company Incurs Acquired Indebtedness, the amount of such
Net Cash Proceeds exceeds one-half of the amount of Acquired Indebtedness so
Incurred and (B) 80% of the fair market value of property (other than cash and
cash equivalents) received by the Company after the Closing Date from the sale
of its Capital Stock (other than Disqualified Stock) to a Person that is not a
Subsidiary of the Company, to the extent (I) such capital contribution or sale
of Capital Stock has not been used pursuant to clause (iii), (iv), (vi) or (vii)
of the second paragraph of the "Limitation on Restricted Payments" covenant
described below to make a Restricted Payment and (II) if such capital
contribution or Capital Stock is used to consummate a transaction pursuant to
which the Company Incurs Acquired Indebtedness, 80% of the fair market value of
the property received exceeds one-half of the amount of Acquired Indebtedness so
Incurred provided that such Indebtedness does not mature prior to the Stated
Maturity of the Notes and has an Average Life longer than the Notes; (ix)
Acquired Indebtedness; (x) Strategic Subordinated Indebtedness; and (xi)
subordinated Indebtedness of the Company (in addition to Indebtedness permitted
under clauses (i) through (x) above) in an aggregate principal amount
outstanding at any time not to exceed $100 million, less any amount of such
Indebtedness permanently repaid as provided under the "Limitation on Asset
Sales" covenant described below.
(b) Notwithstanding any other provision of this "Limitation on
Indebtedness" covenant, the maximum amount of Indebtedness that the Company or a
Restricted Subsidiary may Incur pursuant to this "Limitation on Indebtedness"
covenant shall not be deemed to be exceeded, with respect to any outstanding
Indebtedness due solely to the result of fluctuations in the exchange rates of
currencies.
(c) For purposes of determining any particular amount of Indebtedness under
this "Limitation on Indebtedness" covenant, (1) Guarantees, Liens or obligations
with respect to letters of credit supporting Indebtedness otherwise included in
the determination of such particular amount shall not be included and (2) any
Liens granted pursuant to the equal and ratable provisions referred to in the
"Limitation on Liens" covenant described below shall not be treated as
Indebtedness. For purposes of determining compliance with
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this "Limitation on Indebtedness" covenant, in the event that an item of
Indebtedness meets the criteria of more than one of the types of Indebtedness
described in the above clauses, the Company, in its sole discretion, shall
classify, and from time to time may reclassify, such item of Indebtedness and
only be required to include the amount and type of such Indebtedness in one of
such clauses.
Limitation on Restricted Payments
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, (i) declare or pay any dividend or make any distribution
on or with respect to its Capital Stock (other than (x) dividends or
distributions payable solely in shares of its Capital Stock (other than
Disqualified Stock) or in options, warrants or other rights to acquire shares of
such Capital Stock and (y) pro rata dividends or distributions on Common Stock
of Restricted Subsidiaries held by minority stockholders) held by Persons other
than the Company or any of its Restricted Subsidiaries, (ii) purchase, redeem,
retire or otherwise acquire for value any shares of Capital Stock of (A) the
Company or an Unrestricted Subsidiary (including options, warrants or other
rights to acquire such shares of Capital Stock) held by any Person or (B) a
Restricted Subsidiary (including options, warrants or other rights to acquire
such shares of Capital Stock) held by any Affiliate of the Company (other than a
Wholly Owned Restricted Subsidiary) or any holder (or any Affiliate of such
holder) of 5% or more of the Capital Stock of the Company, (iii) make any
voluntary or optional principal payment, or voluntary or optional redemption,
repurchase, defeasance, or other acquisition or retirement for value, of
Indebtedness of the Company that is subordinated in right of payment to the
Notes or (iv) make any Investment, other than a Permitted Investment, in any
Person (such payments or any other actions described in clauses (i) through (iv)
above being collectively "Restricted Payments") if, at the time of, and after
giving effect to, the proposed Restricted Payment: (A) a Default or Event of
Default shall have occurred and be continuing, (B) the Company could not Incur
at least $1.00 of Indebtedness under the first paragraph of the "Limitation on
Indebtedness" covenant or (C) the aggregate amount of all Restricted Payments
(the amount, if other than in cash, to be determined in good faith by the Board
of Directors, whose determination shall be conclusive and evidenced by a Board
Resolution) made after the Closing Date shall exceed the sum of (1) 50% of the
aggregate amount of the Adjusted Consolidated Net Income (or, if the Adjusted
Consolidated Net Income is a loss, minus 100% of the amount of such loss)
(determined by excluding income resulting from transfers of assets by the
Company or a Restricted Subsidiary to an Unrestricted Subsidiary) accrued on a
cumulative basis during the period (taken as one accounting period) beginning on
the first day of the fiscal quarter immediately following the Closing Date and
ending on the last day of the last fiscal quarter preceding the Transaction Date
for which reports have been filed with the Commission or provided to the Trustee
pursuant to the "Commission Reports and Reports to Holders" covenant plus (2)
the aggregate Net Cash Proceeds received by the Company after the Closing Date
as a capital contribution or from the issuance and sale permitted by the
Indenture of its Capital Stock (other than Disqualified Stock) to a Person who
is not a Subsidiary of the Company, including an issuance or sale permitted by
the Indenture of Indebtedness of the Company for cash subsequent to the Closing
Date upon the conversion of such Indebtedness into Capital Stock (other than
Disqualified Stock) of the Company, or from the issuance to a Person who is not
a Subsidiary of the Company of any options, warrants or other rights to acquire
Capital Stock of the Company (in each case, exclusive of any Disqualified Stock
or any options, warrants or other rights that are redeemable at the option of
the holder, or are required to be redeemed, prior to the Stated Maturity of the
Notes), in each case except to the extent such Net Cash Proceeds are used to
Incur Indebtedness pursuant to clause (viii) of the second paragraph under the
"Limitation on Indebtedness" covenant, plus (3) an amount equal to the net
reduction in Investments (other than reductions in Permitted Investments) in any
Person resulting from payments of interest on Indebtedness, dividends,
repayments of loans or advances, or other transfers of assets, in each case to
the Company or any Restricted Subsidiary or from the Net Cash Proceeds from the
sale of any such Investment (except, in each case, to the extent any such
payment or proceeds are included in the calculation of Adjusted Consolidated Net
Income), or from redesignations of Unrestricted Subsidiaries as Restricted
Subsidiaries (valued in each case as provided in the definition of
"Investments"), not to exceed, in each case, the amount of Investments
previously made by the Company or any Restricted Subsidiary in such Person or
Unrestricted Subsidiary.
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The foregoing provision shall not be violated by reason of: (i) the payment
of any dividend within 60 days after the date of declaration thereof if, at said
date of declaration, such payment would comply with the foregoing paragraph;
(ii) the redemption, repurchase, defeasance or other acquisition or retirement
for value of Indebtedness that is subordinated in right of payment to the Notes
including premium, if any, and accrued and unpaid interest, with the proceeds
of, or in exchange for, Indebtedness Incurred under clause (iii) of the second
paragraph of part (a) of the "Limitation on Indebtedness" covenant; (iii) the
repurchase, redemption or other acquisition of Capital Stock of the Company or
an Unrestricted Subsidiary (or options, warrants or other rights to acquire such
Capital Stock) in exchange for, or out of the proceeds of a capital contribution
or a substantially concurrent offering of, shares of Capital Stock (other than
Disqualified Stock) of the Company (or options, warrants or other rights to
acquire such Capital Stock); (iv) the making of any principal payment or the
repurchase, redemption, retirement, defeasance or other acquisition for value of
Indebtedness of the Company which is subordinated in right of payment to the
Notes in exchange for, or out of the proceeds of a capital contribution or a
substantially concurrent offering of, shares of the Capital Stock (other than
Disqualified Stock) of the Company (or options, warrants or other rights to
acquire such Capital Stock); (v) payments or distributions, to dissenting
stockholders pursuant to applicable law, pursuant to or in connection with a
consolidation, merger or transfer of assets that complies with the provisions of
the Indenture applicable to mergers, consolidations and transfers of all or
substantially all of the property and assets of the Company; (vi) Investments in
any Person the primary business of which is related, ancillary or complementary
to the business of the Company and its Restricted Subsidiaries on the date of
such Investments; provided that the aggregate amount of Investments made
pursuant to this clause (vi) does not exceed the sum of (a) $20 million and (b)
the amount of Net Cash Proceeds received by the Company after the Closing Date
as a capital contribution or from the sale of its Capital Stock (other than
Disqualified Stock) to a Person who is not a Subsidiary of the Company, except
to the extent such Net Cash Proceeds are used to Incur Indebtedness pursuant to
clause (viii) under the "Limitation on Indebtedness" covenant or to make
Restricted Payments pursuant to clause (C)(2) of the first paragraph, or clauses
(iii) or (iv) of this paragraph, of this "Limitation on Restricted Payments"
covenant, plus (z) the net reduction in Investments made pursuant to this clause
(vi) resulting from distributions on or repayments of such Investments or from
the Net Cash Proceeds from the sale of any such Investment (except in each case
to the extent any such payment or proceeds is included in the calculation of
Adjusted Consolidated Net Income) or from such Person becoming a Restricted
Subsidiary (valued in each case as provided in the definition of "Investments"),
provided that the net reduction in any Investment shall not exceed the amount of
such Investment; (vii) Investments acquired in exchange for Capital Stock (other
than Disqualified Stock) of the Company; (viii) the declaration or payment of
dividends on the Common Stock of the Company following a Public Equity Offering
of such Common Stock, of up to 6% per annum of the Net Cash Proceeds received by
the Company in such Public Equity Offering; (ix) prior to the occurrence of a
Public Market, the purchase, redemption, retirement or other acquisition for
value of shares of Capital Stock of the Company or options to purchase such
shares, held by directors, employees or officers, or former directors, employees
or officers, of the Company or a Restricted Subsidiary (or their estates or
beneficiaries under their estates), upon the death, disability, retirement,
termination of employment or pursuant to the terms of any agreement under which
such shares of Capital Stock or options were issued; provided that the aggregate
consideration paid for such purchase, redemption, retirement or other
acquisition for value of such shares or options after the Closing Date does not
exceed $5 million in the aggregate (unless such repurchases are made with the
proceeds of insurance policies and the shares are purchased from the executors,
administrators, testamentary trustees, heirs, legatees or beneficiaries); (x)
repurchases of Warrants pursuant to a Repurchase Offer; (xi) any purchase of any
fractional share of Common Stock (or other Capital Stock of the Company issuable
upon exercise of the Warrants) in connection with an exercise of the Warrants;
and (xii) other Restricted Payments in an aggregate amount not to exceed $2
million; provided that, except in the case of clauses (i) and (iii), no Default
or Event of Default shall have occurred and be continuing or occur as a
consequence of the actions or payments set forth therein.
Each Restricted Payment permitted pursuant to the preceding paragraph
(other than the Restricted Payment referred to in clause (ii) thereof, an
exchange of Capital Stock for Capital Stock or Indebtedness referred to in
clause (iii) or (iv) thereof and an Investment referred to in clause (vi)
thereof), and the Net
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Cash Proceeds from any capital contribution or any issuance of Capital Stock
referred to in clauses (iii), (iv) and (vi), shall be included in calculating
whether the conditions of clause (C) of the first paragraph of this "Limitation
on Restricted Payments" covenant have been met with respect to any subsequent
Restricted Payments. In the event the proceeds of an issuance of Capital Stock
of the Company are used for the redemption, repurchase or other acquisition of
the Notes, or Indebtedness that is pari passu with the Notes, then the Net Cash
Proceeds of such issuance shall be included in clause (C) of the first paragraph
of this "Limitation on Restricted Payments" covenant only to the extent such
proceeds are not used for such redemption, repurchase or other acquisition of
Indebtedness.
Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries
The Company will not, and will not permit any Restricted Subsidiary to,
create or otherwise cause or suffer to exist or become effective any consensual
encumbrance or restriction of any kind on the ability of any Restricted
Subsidiary to (i) pay dividends or make any other distributions permitted by
applicable law on any Capital Stock of such Restricted Subsidiary owned by the
Company or any other Restricted Subsidiary, (ii) pay any Indebtedness owed to
the Company or any other Restricted Subsidiary, (iii) make loans or advances to
the Company or any other Restricted Subsidiary or (iv) transfer any of its
property or assets to the Company or any other Restricted Subsidiary.
The foregoing provisions shall not restrict any encumbrances or
restrictions: (i) existing on the Closing Date in the Indenture or any other
agreements in effect on the Closing Date, and any extensions, refinancings,
renewals or replacements of such agreements; provided that the encumbrances and
restrictions in any such extensions, refinancings, renewals or replacements are
no less favorable in any material respect to the Holders than those encumbrances
or restrictions that are then in effect and that are being extended, refinanced,
renewed or replaced; (ii) existing under or by reason of applicable law; (iii)
existing with respect to any Person or the property or assets of such Person
acquired by the Company or any Restricted Subsidiary, existing at the time of
such acquisition and not incurred in contemplation thereof, which encumbrances
or restrictions are not applicable to any Person or the property or assets of
any Person other than such Person or the property or assets of such Person so
acquired; (iv) in the case of clause (iv) of the first paragraph of this
"Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries" covenant, (A) that restrict in a customary manner the subletting,
assignment or transfer of any property or asset that is a lease, license,
conveyance or contract or similar property or asset, (B) existing by virtue of
any transfer of, agreement to transfer, option or right with respect to, or Lien
on, any property or assets of the Company or any Restricted Subsidiary not
otherwise prohibited by the Indenture or (C) arising or agreed to in the
ordinary course of business, not relating to any Indebtedness, and that do not,
individually or in the aggregate, detract from the value of property or assets
of the Company or any Restricted Subsidiary in any manner material to the
Company or any Restricted Subsidiary; (v) with respect to a Restricted
Subsidiary and imposed pursuant to an agreement that has been entered into for
the sale or disposition of all or substantially all of the Capital Stock of, or
property and assets of, such Restricted Subsidiary; or (vi) contained in the
terms of any Indebtedness or any agreement pursuant to which such Indebtedness
was issued if (A) the encumbrance or restriction applies only in the event of a
payment default or a default with respect to a financial covenant contained in
such Indebtedness or agreement, (B) the encumbrance or restriction is not
materially more disadvantageous to the Holders of the Notes than is customary in
comparable financings (as determined by the Company) and (C) the Company
determines that any such encumbrance or restriction will not materially affect
the Company's ability to make principal or interest payments on the Notes.
Nothing contained in this "Limitation on Dividend and Other Payment Restrictions
Affecting Restricted Subsidiaries" covenant shall prevent the Company or any
Restricted Subsidiary from (1) creating, incurring, assuming or suffering to
exist any Liens otherwise permitted in the "Limitation on Liens" covenant or (2)
restricting the sale or other disposition of property or assets of the Company
or any of its Restricted Subsidiaries that secure Indebtedness of the Company or
any of its Restricted Subsidiaries.
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Limitation on the Issuance and Sale of Capital Stock of Restricted
Subsidiaries
The Company will not sell, and will not permit any Restricted Subsidiary,
directly or indirectly, to issue or sell, any shares of Capital Stock of a
Restricted Subsidiary (including options, warrants or other rights to purchase
shares of such Capital Stock) except (i) to the Company or a Wholly Owned
Restricted Subsidiary; (ii) issuances of director's qualifying shares or sales
to foreign nationals of shares of Capital Stock of foreign Restricted
Subsidiaries, to the extent required by applicable law; (iii) if, immediately
after giving effect to such issuance or sale, such Restricted Subsidiary would
no longer constitute a Restricted Subsidiary and any Investment in such Person
remaining after giving effect to such issuance or sale would have been permitted
to be made under the "Limitation on Restricted Payments" covenant if made on the
date of such issuance or sale; or (iv) issuances or sales of Common Stock of a
Restricted Subsidiary, provided that the Company or such Restricted Subsidiary
applies the Net Cash Proceeds, if any, of any such sale in accordance with
clause (A) or (B) of the "Limitation on Asset Sales" covenant described below.
Limitation on Issuances of Guarantees by Restricted Subsidiaries
The Company will not permit any Restricted Subsidiary, directly or
indirectly, to Guarantee any Indebtedness of the Company which is pari passu
with or subordinate in right of payment to the Notes ("Guaranteed
Indebtedness"), unless (i) such Restricted Subsidiary simultaneously executes
and delivers a supplemental indenture to the Indenture providing for a Guarantee
(a "Subsidiary Guarantee") of payment of the Notes by such Restricted Subsidiary
and (ii) such Restricted Subsidiary waives and will not in any manner whatsoever
claim or take the benefit or advantage of, any rights of reimbursement,
indemnity or subrogation or any other rights against the Company or any other
Restricted Subsidiary as a result of any payment by such Restricted Subsidiary
under its Subsidiary Guarantee; provided that this paragraph shall not be
applicable to any Guarantee of any Restricted Subsidiary that existed at the
time such Person became a Restricted Subsidiary and was not Incurred in
connection with, or in contemplation of, such Person becoming a Restricted
Subsidiary. If the Guaranteed Indebtedness is (A) pari passu with the Notes,
then the Guarantee of such Guaranteed Indebtedness shall be pari passu with, or
subordinated to, the Subsidiary Guarantee or (B) subordinated to the Notes, then
the Guarantee of such Guaranteed Indebtedness shall be subordinated to the
Subsidiary Guarantee at least to the extent that the Guaranteed Indebtedness is
subordinated to the Notes.
Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary may provide by its terms that it shall be automatically and
unconditionally released and discharged upon (i) any sale, exchange or transfer,
to any Person not an Affiliate of the Company, of all of the Company's and each
Restricted Subsidiary's Capital Stock in, or all or substantially all the assets
of, such Restricted Subsidiary (which sale, exchange or transfer is not
prohibited by the Indenture) or (ii) the release or discharge of the Guarantee
which resulted in the creation of such Subsidiary Guarantee, except a discharge
or release by or as a result of payment under such Guarantee.
Limitation on Transactions with Shareholders and Affiliates
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, enter into, renew or extend any transaction (including,
without limitation, the purchase, sale, lease or exchange of property or assets,
or the rendering of any service) with any holder (or any Affiliate of such
holder) of 5% or more of any class of Capital Stock of the Company or with any
Affiliate of the Company or any Restricted Subsidiary, except upon fair and
reasonable terms no less favorable to the Company or such Restricted Subsidiary
than could be obtained, at the time of such transaction or, if such transaction
is pursuant to a written agreement, at the time of the execution of the
agreement providing therefor, in a comparable arm's-length transaction with a
Person that is not such a holder or an Affiliate.
The foregoing limitation does not limit, and shall not apply to (i)
transactions (A) approved by a majority of the disinterested members of the
Board of Directors or (B) for which the Company or a Restricted Subsidiary
delivers to the Trustee a written opinion of a nationally recognized investment
banking firm stating that the transaction is fair to the Company or such
Restricted Subsidiary from a financial point of view;
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(ii) any transaction solely between the Company and any of its Wholly Owned
Restricted Subsidiaries or solely between Wholly Owned Restricted Subsidiaries;
(iii) the payment of reasonable and customary regular fees to directors of the
Company who are not employees of the Company; (iv) any payments or other
transactions pursuant to any tax-sharing agreement between the Company and any
other Person with which the Company files a consolidated tax return or with
which the Company is part of a consolidated group for tax purposes; or (v) any
Restricted Payments not prohibited by the "Limitation on Restricted Payments"
covenant. Notwithstanding the foregoing, any transaction or series of related
transactions covered by the first paragraph of this "Limitation on Transactions
with Shareholders and Affiliates" covenant and not covered by clauses (ii)
through (v) of this paragraph, the aggregate amount of which exceeds $1 million
in value, must be approved or determined to be fair in the manner provided for
in clause (i)(A) or (B) above.
Limitation on Liens
The Company will not, and will not permit any Restricted Subsidiary to,
create, incur, assume or suffer to exist any Lien on any of its assets or
properties of any character (including, without limitation, licenses), or any
shares of Capital Stock or Indebtedness of any Restricted Subsidiary, without
making effective provision for all of the Notes and all other amounts due under
the Indenture to be directly secured equally and ratably with (or, if the
obligation or liability to be secured by such Lien is subordinated in right of
payment to the Notes, prior to) the obligation or liability secured by such
Lien.
The foregoing limitation does not apply to (i) Liens existing on the
Closing Date; (ii) Liens granted after the Closing Date on any assets or Capital
Stock of the Company or its Restricted Subsidiaries created in favor of the
Holders; (iii) Liens with respect to the assets of a Restricted Subsidiary
granted by such Restricted Subsidiary to the Company or a Wholly Owned
Restricted Subsidiary to secure Indebtedness owing to the Company or such other
Restricted Subsidiary; (iv) Liens securing Indebtedness which is Incurred to
refinance secured Indebtedness which is permitted to be Incurred under clause
(iii) of the second paragraph of the "Limitation on Indebtedness" covenant;
provided that such Liens do not extend to or cover any property or assets of the
Company or any Restricted Subsidiary other than the property or assets securing
the Indebtedness being refinanced; (v) Liens on the Capital Stock of, or any
property or assets of, a Restricted Subsidiary securing Indebtedness of such
Restricted Subsidiary permitted under the "Limitation on Indebtedness" covenant;
(vi) Liens on the Capital Stock of Restricted Subsidiaries securing up to $100.0
million of Indebtedness Incurred under clause (vii) of the "Limitation on
Indebtedness" covenant; or (vii) Permitted Liens.
Limitation on Sale-Leaseback Transactions
The Company will not, and will not permit any Restricted Subsidiary to,
enter into any sale-leaseback transaction involving any of its assets or
properties whether now owned or hereafter acquired, whereby the Company or a
Restricted Subsidiary sells or transfers such assets or properties and then or
thereafter leases such assets or properties or any part thereof or any other
assets or properties which the Company or such Restricted Subsidiary, as the
case may be, intends to use for substantially the same purpose or purposes as
the assets or properties sold or transferred.
The foregoing restriction does not apply to any sale-leaseback transaction
if (i) the lease is for a period, including renewal rights, of not in excess of
three years; (ii) the lease secures or relates to industrial revenue or
pollution control bonds; (iii) the transaction is solely between the Company and
any Wholly Owned Restricted Subsidiary or solely between Wholly Owned Restricted
Subsidiaries; or (iv) the Company or such Restricted Subsidiary, within 12
months after the sale or transfer of any assets or properties is completed,
applies an amount not less than the net proceeds received from such sale in
accordance with clause (A) or (B) of the first paragraph of the "Limitation on
Asset Sales" covenant described below.
Limitation on Asset Sales
The Company will not, and will not permit any Restricted Subsidiary to,
consummate any Asset Sale, unless (i) the consideration received by the Company
or such Restricted Subsidiary is at least equal to the fair market value of the
assets sold or disposed of and (ii) at least 75% of the consideration received
consists of cash or Temporary Cash Investments; provided, however, that this
clause (ii) shall not apply to long-term
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assignments in capacity in a telecommunications network. In the event and to the
extent that the Net Cash Proceeds received by the Company or any of its
Restricted Subsidiaries from one or more Asset Sales occurring on or after the
Closing Date in any period of 12 consecutive months exceed 10% of Adjusted
Consolidated Net Tangible Assets (determined as of the date closest to the
commencement of such 12-month period for which a consolidated balance sheet of
the Company and its Subsidiaries has been filed with the Commission pursuant to
the "Commission Reports and Reports to Holders" covenant), then the Company
shall or shall cause the relevant Restricted Subsidiary to (i) within 12 months
after the date Net Cash Proceeds so received exceed 10% of Adjusted Consolidated
Net Tangible Assets (A) apply an amount equal to such excess Net Cash Proceeds
to permanently repay unsubordinated Indebtedness of the Company, or any
Restricted Subsidiary providing a Subsidiary Guarantee pursuant to the
"Limitation on Issuances of Guarantees by Restricted Subsidiaries" covenant
described above or Indebtedness of any other Restricted Subsidiary, in each case
owing to a Person other than the Company or any of its Restricted Subsidiaries
or (B) invest an equal amount, or the amount not so applied pursuant to clause
(A) (or enter into a definitive agreement committing to so invest within 12
months after the date of such agreement), in property or assets (other than
current assets) of a nature or type or that are used in a business (or in a
company having property and assets of a nature or type, or engaged in a
business) similar or related to the nature or type of the property and assets
of, or the business of, the Company and its Restricted Subsidiaries existing on
the date of such investment (as determined in good faith by the Board of
Directors, whose determination shall be conclusive and evidenced by a Board
Resolution) and (ii) apply (no later than the end of the 12-month period
referred to in clause (i)) such excess Net Cash Proceeds (to the extent not
applied pursuant to clause (i)) as provided in the following paragraph of this
"Limitation on Asset Sales" covenant. The amount of such excess Net Cash
Proceeds required to be applied (or to be committed to be applied) during such
12-month period as set forth in clause (i) of the preceding sentence and not
applied as so required by the end of such period shall constitute "Excess
Proceeds."
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to this
"Limitation on Asset Sales" covenant totals at least $5 million, the Company
must commence, not later than the fifteenth Business Day of such month, and
consummate an Offer to Purchase from the Holders on a pro rata basis an
aggregate Accreted Value of Notes equal to the Excess Proceeds on such date, at
a purchase price equal to 100% of the Accreted Value of the Notes on the
relevant Payment Date, plus, in each case, accrued interest (if any) to the
Payment Date.
REPURCHASE OF NOTES UPON A CHANGE OF CONTROL
The Company must commence, within 30 days of the occurrence of a Change of
Control, and consummate an Offer to Purchase for all Notes then outstanding, at
a purchase price equal to 101% of the Accreted Value thereof on the relevant
Payment Date, plus accrued interest (if any) to the Payment Date.
There can be no assurance that the Company will have sufficient funds
available at the time of any Change of Control to make any debt payment
(including repurchases of Notes) required by the foregoing covenant (as well as
may be contained in other securities of the Company which might be outstanding
at the time). The above covenant requiring the Company to repurchase the Notes
will, unless consents are obtained, require the Company to repay all
indebtedness then outstanding which by its terms would prohibit such Note
repurchase, either prior to or concurrently with such Note repurchase.
COMMISSION REPORTS AND REPORTS TO HOLDERS
At all times from and after the earlier of (i) the date of the commencement
of an Exchange Offer or the effectiveness of a Shelf Registration Statement (the
"Registration") and (ii) the date that is six months after the Closing Date, in
either case, whether or not the Company is then required to file reports with
the Commission, the Company shall file with the Commission all such reports and
other information as it would be required to file with the Commission by
Sections 13(a) or 15(d) under the Securities Exchange Act of 1934 if it were
subject thereto. The Company shall supply the Trustee and each Holder or shall
supply to the Trustee for forwarding to each such Holder, without cost to such
Holder, copies of such reports and other information. In addition, at all times
prior to the earlier of the date of the Registration and the date that is six
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months after the Closing Date, the Company shall, at its cost, deliver to each
Holder of the Notes quarterly and annual reports substantially equivalent to
those which would be required by the Exchange Act. In addition, at all times
prior to the Registration, upon the request of any Holder or any prospective
purchaser of the Notes designated by a Holder, the Company shall supply to such
Holder or such prospective purchaser the information required under Rule 144A
under the Securities Act.
EVENTS OF DEFAULT
The following events are defined as "Events of Default" in the Indenture:
(a) default in the payment of principal of (or premium, if any, on) any Note
when the same becomes due and payable at maturity, upon acceleration, redemption
or otherwise; (b) default in the payment of interest on any Note when the same
becomes due and payable, and such default continues for a period of 30 days; (c)
default in the performance or breach of the provisions of the Indenture
applicable to mergers, consolidations and transfers of all or substantially all
of the assets of the Company or the failure to make or consummate an Offer to
Purchase in accordance with the "Limitation on Asset Sales" or "Repurchase of
Notes upon a Change of Control" covenant; (d) the Company defaults in the
performance of or breaches any other covenant or agreement of the Company in the
Indenture or under the Notes (other than a default specified in clause (a), (b)
or (c) above) and such default or breach continues for a period of 30
consecutive days after written notice by the Trustee or the Holders of 25% or
more in aggregate principal amount of the Notes; (e) there occurs with respect
to any issue or issues of Indebtedness of the Company or any Significant
Subsidiary having an outstanding principal amount of $5 million or more in the
aggregate for all such issues of all such Persons, whether such Indebtedness now
exists or shall hereafter be created, (I) an event of default that has caused
the holder thereof to declare such Indebtedness to be due and payable prior to
its Stated Maturity and such Indebtedness has not been discharged in full or
such acceleration has not been rescinded or annulled within 30 days of such
acceleration and/or (II) the failure to make a principal payment at the final
(but not any interim) fixed maturity and such defaulted payment shall not have
been made, waived or extended within 30 days of such payment default; (f) any
final judgment or order (not covered by insurance) for the payment of money in
excess of $5 million in the aggregate for all such final judgments or orders
against all such Persons (treating any deductibles, self-insurance or retention
as not so covered) shall be rendered against the Company or any Significant
Subsidiary and shall not be paid or discharged, and there shall be any period of
30 consecutive days following entry of the final judgment or order that causes
the aggregate amount for all such final judgments or orders outstanding and not
paid or discharged against all such Persons to exceed $5 million during which a
stay of enforcement of such final judgment or order, by reason of a pending
appeal or otherwise, shall not be in effect; (g) a court having jurisdiction in
the premises enters a decree or order for (A) relief in respect of the Company
or any Significant Subsidiary in an involuntary case under any applicable
bankruptcy, insolvency or other similar law now or hereafter in effect, (B)
appointment of a receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar official of the Company or any Significant Subsidiary or
for all or substantially all of the property and assets of the Company or any
Significant Subsidiary or (C) the winding up or liquidation of the affairs of
the Company or any Significant Subsidiary and, in each case, such decree or
order shall remain unstayed and in effect for a period of 30 consecutive days;
or (h) the Company or any Significant Subsidiary (A) commences a voluntary case
under any applicable bankruptcy, insolvency or other similar law now or
hereafter in effect, or consents to the entry of an order for relief in an
involuntary case under any such law, (B) consents to the appointment of or
taking possession by a receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar official of the Company or any Significant Subsidiary or
for all or substantially all of the property and assets of the Company or any
Significant Subsidiary or (C) effects any general assignment for the benefit of
creditors.
If an Event of Default (other than an Event of Default specified in clause
(g) or (h) above that occurs with respect to the Company) occurs and is
continuing under the Indenture, the Trustee or the Holders of at least 25% in
aggregate principal amount of the Notes, then outstanding, by written notice to
the Company (and to the Trustee if such notice is given by the Holders), may,
and the Trustee at the request of such Holders shall, declare the Accreted Value
of, premium, if any, and accrued interest on the Notes to be immediately due and
payable. Upon a declaration of acceleration, such Accreted Value of, premium, if
any, and accrued interest shall be immediately due and payable. In the event of
a declaration of acceleration
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because an Event of Default set forth in clause (e) above has occurred and is
continuing, such declaration of acceleration shall be automatically rescinded
and annulled if the event of default triggering such Event of Default pursuant
to clause (e) shall be remedied or cured by the Company or the relevant
Significant Subsidiary or waived by the holders of the relevant Indebtedness
within 60 days after the declaration of acceleration with respect thereto. If an
Event of Default specified in clause (g) or (h) above occurs with respect to the
Company, the Accreted Value of, premium, if any, and accrued interest on the
Notes then outstanding shall ipso facto become and be immediately due and
payable without any declaration or other act on the part of the Trustee or any
Holder. The Holders of at least a majority in principal amount of the
outstanding Notes by written notice to the Company and to the Trustee, may waive
all past defaults and rescind and annul a declaration of acceleration and its
consequences if (i) all existing Events of Default, other than the nonpayment of
the Accreted Value of, premium, if any, and interest on the Notes that have
become due solely by such declaration of acceleration, have been cured or waived
and (ii) the rescission would not conflict with any judgment or decree of a
court of competent jurisdiction. For information as to the waiver of defaults,
see "-- Modification and Waiver."
The Holders of at least a majority in aggregate principal amount of the
outstanding Notes may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee. However, the Trustee may refuse to follow any
direction that conflicts with law or the Indenture, that may involve the Trustee
in personal liability, or that the Trustee determines in good faith may be
unduly prejudicial to the rights of Holders of Notes not joining in the giving
of such direction and may take any other action it deems proper that is not
inconsistent with any such direction received from Holders of Notes. A Holder
may not pursue any remedy with respect to the Indenture or the Notes unless: (i)
the Holder gives the Trustee written notice of a continuing Event of Default;
(ii) the Holders of at least 25% in aggregate principal amount of outstanding
Notes make a written request to the Trustee to pursue the remedy; (iii) such
Holder or Holders offer the Trustee indemnity satisfactory to the Trustee
against any costs, liability or expense; (iv) the Trustee does not comply with
the request within 60 days after receipt of the request and the offer of
indemnity; and (v) during such 60-day period, the Holders of a majority in
aggregate principal amount of the outstanding Notes do not give the Trustee a
direction that is inconsistent with the request. However, such limitations do
not apply to the right of any Holder of a Note to receive payment of the
Accreted Value of, premium, if any, or interest on, such Note or to bring suit
for the enforcement of any such payment, on or after the due date expressed in
the Notes, which right shall not be impaired or affected without the consent of
the Holder.
The Indenture requires certain officers of the Company to certify, on or
before a date not more than 90 days after the end of each fiscal year, that a
review has been conducted of the activities of the Company and its Restricted
Subsidiaries and the Company's and its Restricted Subsidiaries' performance
under the Indenture and that the Company has fulfilled all obligations
thereunder, or, if there has been a default in the fulfillment of any such
obligation, specifying each such default and the nature and status thereof. The
Company will also be obligated to notify the Trustee of any default or defaults
in the performance of any covenants or agreements under the Indenture.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company will not consolidate with, merge with or into, or sell, convey,
transfer, lease or otherwise dispose of all or substantially all of its property
and assets (as an entirety or substantially an entirety in one transaction or a
series of related transactions) to, any Person or permit any Person to merge
with or into the Company unless: (i) the Company shall be the continuing Person,
or the Person (if other than the Company) formed by such consolidation or into
which the Company is merged or that acquired or leased such property and assets
of the Company shall be a corporation organized and validly existing under the
laws of the United States of America or any jurisdiction thereof and shall
expressly assume, by a supplemental indenture, executed and delivered to the
Trustee, all of the obligations of the Company on all of the Notes and under the
Indenture; (ii) immediately after giving effect to such transaction, no Default
or Event of Default shall have occurred and be continuing; (iii) immediately
after giving effect to such transaction on a pro forma basis, the Company or any
Person becoming the successor obligor of the Notes shall have a Consolidated Net
Worth
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equal to or greater than the Consolidated Net Worth of the Company immediately
prior to such transaction; (iv) immediately after giving effect to such
transaction on a pro forma basis the Company, or any Person becoming the
successor obligor of the Notes, as the case may be, could Incur at least $1.00
of Indebtedness under the first paragraph of the "Limitation on Indebtedness"
covenant; provided that this clause (iv) shall not apply to (x) a consolidation,
merger or sale of all (but not less than all) of the assets of the Company if
all Liens and Indebtedness of the Company or any Person becoming the successor
obligor on the Notes, as the case may be, and its Restricted Subsidiaries
outstanding immediately after such transaction would, if Incurred at such time,
have been permitted to be Incurred (and all such Liens and Indebtedness, other
than Liens and Indebtedness of the Company and its Restricted Subsidiaries
outstanding immediately prior to the transaction, shall be deemed to have been
Incurred) for all purposes of the Indenture or (y) a consolidation, merger or
sale of all or substantially all of the assets of the Company if immediately
after giving effect to such transaction on a pro forma basis, the Company or any
Person becoming the successor obligor of the Notes shall have a Consolidated
Leverage Ratio equal to or less than the Consolidated Leverage Ratio of the
Company immediately prior to such transaction; and (v) the Company delivers to
the Trustee an Officers' Certificate (attaching the arithmetic computations to
demonstrate compliance with clauses (iii) and (iv) above) and Opinion of
Counsel, in each case stating that such consolidation, merger or transfer and
such supplemental indenture complies with this provision and that all conditions
precedent provided for herein relating to such transaction have been complied
with; provided, however, that clauses (iii) and (iv) above do not apply if, in
the good faith determination of the Board of Directors of the Company, whose
determination shall be evidenced by a Board Resolution, the principal purpose of
such transaction is to change the state of incorporation of the Company; and
provided further that any such transaction shall not have as one of its purposes
the evasion of the foregoing limitations.
DEFEASANCE
Defeasance and Discharge. The Indenture provides that the Company will be
deemed to have paid and will be discharged from any and all obligations in
respect of the Notes on the 123rd day after the deposit referred to below, and
the provisions of the Indenture will no longer be in effect with respect to the
Notes (except for, among other matters, certain obligations to register the
transfer or exchange of the Notes, to replace stolen, lost or mutilated Notes,
to maintain paying agencies and to hold monies for payment in trust) if, among
other things, (A) the Company has deposited with the Trustee, in trust, money
and/or U.S. Government Obligations that through the payment of interest and
principal in respect thereof in accordance with their terms will provide money
in an amount sufficient to pay the principal of, premium, if any, and accrued
interest on the Notes on the Stated Maturity of such payments in accordance with
the terms of the Indenture and the Notes, (B) the Company has delivered to the
Trustee (i) either (x) an Opinion of Counsel to the effect that Holders will not
recognize income, gain or loss for federal income tax purposes as a result of
the Company's exercise of its option under this "Defeasance" provision and will
be subject to federal income tax on the same amount and in the same manner and
at the same times as would have been the case if such deposit, defeasance and
discharge had not occurred, which Opinion of Counsel must be based upon (and
accompanied by a copy of) a ruling of the Internal Revenue Service to the same
effect unless there has been a change in applicable federal income tax law after
the Closing Date such that a ruling is no longer required or (y) a ruling
directed to the Trustee received from the Internal Revenue Service to the same
effect as the aforementioned Opinion of Counsel and (ii) an Opinion of Counsel
to the effect that the creation of the defeasance trust does not violate the
Investment Company Act of 1940 and after the passage of 123 days following the
deposit, the trust fund will not be subject to the effect of Section 547 of the
United States Bankruptcy Code or Section 15 of the New York Debtor and Creditor
Law, (C) immediately after giving effect to such deposit on a pro forma basis,
no Event of Default, or event that after the giving of notice or lapse of time
or both would become an Event of Default, shall have occurred and be continuing
on the date of such deposit or during the period ending on the 123rd day after
the date of such deposit, and such deposit shall not result in a breach or
violation of, or constitute a default under, any other agreement or instrument
to which the Company or any of its Subsidiaries is a party or by which the
Company or any of its Subsidiaries is bound and (D) if at such time the Notes
are listed on a national securities exchange, the Company has delivered to the
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Trustee an Opinion of Counsel to the effect that the Notes will not be delisted
as a result of such deposit, defeasance and discharge.
Defeasance of Certain Covenants and Certain Events of Default. The
Indenture further provides that the provisions of the Indenture will no longer
be in effect with respect to clauses (iii) and (iv) under "Consolidation, Merger
and Sale of Assets" and all the covenants described herein under "Covenants,"
clause (c) under "Events of Default" with respect to such clauses (iii) and (iv)
under "Consolidation, Merger and Sale of Assets," clause (d) under "Events of
Default" with respect to such other covenants and clauses (e) and (f) under
"Events of Default" shall be deemed not to be Events of Default upon, among
other things, the deposit with the Trustee, in trust, of money and/or U.S.
Government Obligations that through the payment of interest and principal in
respect thereof in accordance with their terms will provide money in an amount
sufficient to pay the principal of, premium, if any, and accrued interest on the
Notes on the Stated Maturity of such payments in accordance with the terms of
the Indenture and the Notes, the satisfaction of the provisions described in
clauses (B)(ii), (C) and (D) of the preceding paragraph and the delivery by the
Company to the Trustee of an Opinion of Counsel to the effect that, among other
things, the Holders will not recognize income, gain or loss for federal income
tax purposes as a result of such deposit and defeasance of certain covenants and
Events of Default and will be subject to federal income tax on the same amount
and in the same manner and at the same times as would have been the case if such
deposit and defeasance had not occurred.
Defeasance and Certain Other Events of Default. In the event the Company
exercises its option to omit compliance with certain covenants and provisions of
the Indenture with respect to the Notes as described in the immediately
preceding paragraph and the Notes are declared due and payable because of the
occurrence of an Event of Default that remains applicable, the amount of money
and/or U.S. Government Obligations on deposit with the Trustee will be
sufficient to pay amounts due on the Notes at the time of their Stated Maturity
but may not be sufficient to pay amounts due on the Notes at the time of the
acceleration resulting from such Event of Default. However, the Company will
remain liable for such payments.
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by the Company
and the Trustee with the consent of the Holders of not less than a majority in
aggregate principal amount of the outstanding Notes; provided, however, that no
such modification or amendment may, without the consent of each Holder affected
thereby, (i) change the Stated Maturity of the principal of, or any installment
of interest on, any Note, (ii) reduce the Accreted Value of, or premium, if any,
or interest on, any Note, (iii) change the place or currency of payment of
principal of, or premium, if any, or interest on, any Note, (iv) impair the
right to institute suit for the enforcement of any payment on or after the
Stated Maturity (or, in the case of a redemption, on or after the Redemption
Date) of any Note, (v) reduce the above-stated percentage of outstanding Notes
the consent of whose Holders is necessary to modify or amend the Indenture, (vi)
waive a default in the payment of principal of, premium, if any, or interest on
the Notes or (vii) reduce the percentage or aggregate principal amount of
outstanding Notes the consent of whose Holders is necessary for waiver of
compliance with certain provisions of the Indenture or for waiver of certain
defaults.
NO PERSONAL LIABILITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS, DIRECTORS, OR
EMPLOYEES
The Indenture provides that no recourse for the payment of the principal
of, premium, if any, or interest on any of the Notes or for any claim based
thereon or otherwise in respect thereof, and no recourse under or upon any
obligation, covenant or agreement of the Company in the Indenture, or in any of
the Notes or because of the creation of any Indebtedness represented thereby,
shall be had against any incorporator, stockholder, officer, director, employee
or controlling person of the Company or of any successor Person thereof. Each
Holder, by accepting the Notes, waives and releases all such liability.
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CONCERNING THE TRUSTEE
The Indenture provides that, except during the continuance of a Default,
the Trustee will not be liable, except for the performance of such duties as are
specifically set forth in such Indenture. If an Event of Default has occurred
and is continuing, the Trustee will use the same degree of care and skill in its
exercise of the rights and powers vested in it under the Indenture as a prudent
person would exercise under the circumstances in the conduct of such person's
own affairs.
The Indenture and provisions of the Trust Indenture Act of 1939, as
amended, incorporated by reference therein contain limitations on the rights of
the Trustee, should it become a creditor of the Company, to obtain payment of
claims in certain cases or to realize on certain property received by it in
respect of any such claims, as security or otherwise. The Trustee is permitted
to engage in other transactions; provided, however, that if it acquires any
conflicting interest, it must eliminate such conflict or resign.
BOOK ENTRY; DELIVERY AND FORM
The New Notes will be represented by one or more permanent global notes in
definitive, fully registered form without interest coupons (the "Global Notes"),
and will be deposited with the Trustee as custodian for, and registered in the
name of a nominee of, DTC.
Ownership of beneficial interests in a Global Note will be limited to
persons who have accounts with DTC ("participants") or persons who hold
interests through participants. Ownership of beneficial interests in a Global
Note will be shown on, and the transfer of that ownership will be effected only
through, records maintained by DTC or its nominee (with respect to interests of
participants) and the records of participants (with respect to interests of
persons other than participants). Qualified institutional buyers may hold their
interests in a Global Note directly through DTC if they are participants in such
system, or indirectly through organizations which are participants in such
system.
So long as DTC, or its nominee, is the registered owner or holder of a
Global Note, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the New Notes represented by such Global Notes for all
purposes under the Indenture and the New Notes. No beneficial owner of an
interest in a Global Note will be able to transfer that interest except in
accordance with DTC's applicable procedures, in addition to those provided for
under the Indenture.
Payments of the principal of, and interest on, a Global Note will be made
to DTC or its nominee, as the case may be, as the registered owner thereof.
Neither the Company, the Trustee nor any Paying Agent will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in a Global Note or
for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal interest in respect of a Global Note, will credit participants'
accounts with payments in amounts proportionate to their respective beneficial
interests in the principal amount of such Global Note as shown on the records of
DTC or its nominee. The Company also expects that payments by participants to
owners of beneficial interests in such Global Note held through such
participants will be governed by standing instructions and customary practices,
as is now the case with securities held for the accounts of customers registered
in the names of nominees for such customers. Such payments will be the
responsibility of such participants.
Transfers between the participants in DTC will be effected in the ordinary
way in accordance with DTC rules and will be settled in same-day funds.
The Company expects that DTC will take any action permitted to be taken by
a holder of New Notes only at the direction of one or more participants to whose
account the DTC interests in a Global Note is credited and only in respect of
such portion of the aggregate principal amount of New Notes as to which such
participant or participants has or have given such direction. However, if there
is an Event of Default under the New Notes, DTC will exchange the applicable
Global Note for certificated notes, which it will distribute to its
participants.
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The Company understands that: DTC is a limited purpose trust company
organized under the laws of the State of New York, a "banking organization"
within the meaning of New York Banking Law, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the Uniform Commercial
Code and a "Clearing Agency" registered pursuant to the provisions of Section
17A of the Exchange Act. DTC was created to hold securities for its participants
and facilitate the clearance and settlement of securities transactions between
participants through electronic book-entry changes in accounts of its
participants, thereby eliminating the need for physical movement of certificates
and certain other organizations. Indirect access to the DTC system is available
to others such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a participant, either directly or
indirectly ("indirect participants").
Although DTC is expected to follow the foregoing procedures in order to
facilitate transfers of interests in a Global Note among participants of DTC, it
is under no obligation to perform or continue to perform such procedures, and
such procedures may be discontinued at any time. Neither the Company nor the
Trustee will have any responsibility for the performance by DTC or its
participants or indirect participants of its obligations under the rules and
procedures governing its operations.
If DTC is at any time unwilling or unable to continue as a depositary for
the Global Notes and a successor depositary is not appointed by the Company
within 90 days, the Company will issue certificated notes, pursuant to the
Indenture.
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DESCRIPTION OF THE WARRANTS
GENERAL
On February 3, 1998, the Company issued the Warrants pursuant to the
Warrant Agreement between the Company and The Bank of New York (the "Warrant
Agent"). The following summary of certain provisions of the Warrant Agreement
does not purport to be complete and is subject to, and qualified in its entirety
by reference to, the provisions of the Warrant Agreement, including the
definitions of certain terms therein. Wherever particular defined terms of the
Warrant Agreement, not otherwise defined herein, are referred to, such defined
terms are incorporated herein by reference. A copy of the Warrant Agreement is
filed as an exhibit to the Exchange Offer Registration Statement of which this
Prospectus forms a part.
Each Warrant is evidenced by a Warrant Certificate which entitles the
holder thereof to purchase .0034224719 shares of Common Stock of the Company at
a price (the "Exercise Price") of $.01 per share, subject to adjustment as
provided in the Warrant Agreement. The Warrants may be exercised at any time
beginning one year after the date of original issuance of the Warrants and prior
to the close of business on the tenth anniversary of the date of original
issuance of the Warrants; provided that the Warrants will become exercisable in
connection with the Equity Offering (or if the Equity Offering does not occur,
with the initial public offering of the Company). Warrants not exercised by such
date will expire. The aggregate number of the shares of Common Stock issuable
upon exercise of the Warrants is equal to approximately 1.5% of the outstanding
shares of Common Stock, on a fully diluted basis as of the date of this
Prospectus, assuming exercise of the Warrants, conversion of the Company's
Preferred Stock, and exercise of all employee options currently outstanding or
authorized under the Company's existing stock option plan.
The Warrants will become separately transferable from the Notes on the
earliest to occur of (i) the date that is six months following the date of
original issuance of the Warrants, (ii) the commencement of the Exchange Offer
and (iii) the effective date of a shelf registration statement with respect to
the Notes.
Upon the occurrence of a merger with a person in connection with which the
consideration to shareholders of the Company is not all cash and where the
Common Stock (or other securities) issuable upon exercise of the Warrants would
not be registered under the Exchange Act, the Company or its successor by merger
will be required, upon the expiration of the time periods discussed below, to
offer to repurchase the Warrants for cash.
CERTAIN DEFINITIONS
The Warrant Agreement contains, among others, the following definitions:
A "Financial Expert" is one of the persons listed in Appendix A to the
Warrant Agreement, all of which are nationally recognized investment banking
firms.
An "Independent Financial Expert" is it Financial Expert that does not (and
whose directors, executive officers and 5% stockholders do not) have a direct or
indirect financial interest in the Company or any of its subsidiaries or
affiliates, which has not been for at least five years and, at the time that it
is called upon to give independent financial advice to the Company, is not (and
none of its directors, executive officers or 5% stockholders is) a promoter,
director or officer of the Company or any of its subsidiaries or affiliates.
A "Repurchase Event" is defined to occur on any date when the Company (i)
consolidates with or merges into or with another person (but only where the
holders of Common Stock receive consideration in exchange for all or part of
such Common Stock), if the Common Stock (or other securities) thereafter
issuable upon exercise of the Warrants is not registered under the Exchange Act
or (ii) sells all or substantially all of its assets to another person, if the
Common Stock (or other securities) thereafter issuable upon exercise of the
Warrants is not registered under the Exchange Act; provided that, in each case,
a "Repurchase Event" shall not be deemed to have occurred if the consideration
for such transaction consists solely of cash.
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CERTAIN TERMS
Repurchase
Following the occurrence of a Repurchase Event, the Company must make an
offer to repurchase for cash all outstanding Warrants (a "Repurchase Offer").
The holders of the Warrants may, until 5:00 p.m. (New York City time) on the
date (the "Final Surrender Time") at least 30 but not more than 60 days
following the date on which the Company gives notice of such Repurchase Offer to
such holders, surrender all or part of their Warrants for repurchase by the
Company. Except as otherwise provided in the Warrant Agreement, Warrants
received by the Warrant Agent in proper form for purchase during a Repurchase
Offer prior to the Final Surrender Time are to be repurchased by the Company at
a price in cash (the "Repurchase Price") equal to the value (the "Relevant
Value") on the Valuation Date (as defined in the Warrant Agreement) relating
thereto of the Warrant Shares (and other securities issuable upon exercise of
the Warrants), had the Warrants then been exercised, less the Exercise Price
therefor. The "Relevant Value" of the Common Stock (or other securities) shall
be (i) if the Common Stock (or other securities) is registered under the
Exchange Act, the average of the closing sales prices (on the stock exchange
that is the primary trading market for the Common Stock (or other securities))
of the Common Stock (or other securities) for the 20 consecutive trading days
immediately preceding such Valuation Date or, if the Common Stock (or other
securities) has been registered under the Exchange Act for less than 20 days
trading days before such date, then the average of the closing sales prices for
all of the trading days before such date for which closing sales prices are
available or (ii) if the Common Stock (or other securities) is not registered
under the Exchange Act or if the value cannot be computed under clause (i)
above, the value determined (without giving effect to any discount for lack of
liquidity, the fact that the Company has no class of equity securities
registered under the Exchange Act or the fact that the Common Stock (or other
securities) issuable upon exercise of the Warrants represent a minority in the
Company) by an Independent Financial Expert.
If clause (ii) of the preceding paragraph is applicable, the Board of
Directors of the Company is required to select an Independent Financial Expert
not more than five business days following a Repurchase Event. Within two days
after its selection of the Independent Financial Expert, the Company must
deliver to the Warrant Agent a notice setting forth the name of such Independent
Financial Expert. The Company must use its best efforts (including by selecting
another Independent Financial Expert) to cause the Independent Financial Expert
to deliver to the Company, with a copy to the Warrant Agent, a value report (a
"Value Report") which states the Relevant Value of the Common Stock (or other
securities) being valued as of the Valuation Date and contains a brief statement
as to the nature and scope of the methodologies upon which the determination was
made. The Warrant Agent will have no duty with respect to the Value Report of
any Independent Financial Expert, except to keep it on file available for
inspection by the holders of the Warrants. The determination of the Independent
Financial Expert as to the Relevant Value in accordance with the provisions of
the Warrant Agreement shall be conclusive on all persons.
Exercise
In order to exercise all or any of the Warrants represented by a Warrant
Certificate, the holder thereof is required to surrender to the Warrant Agent
the Warrant Certificate, a duly executed copy of the subscription form set forth
in the Warrant Certificate, and payment in full of the Exercise Price for each
share of Common Stock or other securities issuable upon exercise of such
Warrants, which payment may be made in cash or by certified or official bank or
bank cashier's check payable to the order of the Company or through the
surrender of Warrant Certificates. Upon the exercise of any Warrant in
accordance with the Warrant Agreement, the Warrant Agent will instruct the
Company to transfer promptly to or upon the written order of the holder of such
Warrant Certificate appropriate evidence of ownership of any shares of Common
Stock or other security or property to which it is entitled as a result of such
exercise, registered or otherwise placed in such name or names as it may direct
in writing, and will deliver such evidence of ownership to the person or persons
entitled to receive the same and fractional shares, if any, or an amount in
cash, in lieu of any fractional shares, if any. All shares of Common Stock or
other securities issuable by the Company upon the exercise of the Warrants must
be validly issued, fully paid and nonassessable. The Warrant Agreement provides
that, if the Company conducts an initial public offering of equity securities
other than Common Stock, the Company will give
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holders of Warrants and Common Stock (or other securities) issued or issuable
upon exercise of Warrants the opportunity to convert such Warrants into warrants
to purchase such equity securities and the opportunity to convert such Common
Stock (or other securities) into such equity securities. Such conversion
opportunity will be on terms and conditions determined to be fair and reasonable
by the Company's Board of Directors.
Holders of Warrants will be able to exercise their Warrants only if a
registration statement relating to the Common Stock underlying the Warrants is
then effective and available, or the exercise of such Warrants is exempt from
the registration requirements of the Securities Act, as reasonably determined by
the Company, and such securities are qualified for sale or exempt from
qualification under the applicable securities laws of the states or other
jurisdictions in which the various holders of the Warrants reside.
Anti-dilution Provisions
The Warrant Agreement contains provisions adjusting the Exercise Price and
the number of shares of Common Stock or other securities issuable upon exercise
of a Warrant in the event of (i) a division, consolidation or reclassification
of the shares of Common Stock, (ii) the issuance of rights, options, warrants or
convertible or exchangeable securities to all holders of shares of Common Stock
entitling such holders to subscribe for or purchase shares of Common Stock at a
price per share which is lower than the then current value per share of Common
Stock, subject to certain exceptions, (iii) the issuance of shares of Common
Stock at a price per share that is lower than the then current value of such
shares, except for issuances in connection with an acquisition, merger or
similar transaction with a third party, (iv) certain distributions to all
holders of shares of Common Stock of evidences of indebtedness or assets and (v)
in the discretion of the Company's Board of Directors, in certain other
circumstances. No adjustment in the number of shares of Common Stock purchasable
upon exercise of the Warrants is required, however, for certain bona fide public
offerings or private placements, for grants (or exercises) of options or other
rights to purchase (or the exercise thereof) granted to employees of the Company
under the Company's stock option plans, for issuances of shares of Common Stock
to employees of the Company, for grants (or exercises) of options, warrants or
other agreements or rights to purchase capital stock of the Company existing on
the date of original issuance of the Warrants and in certain other
circumstances, or unless such adjustment would require an increase or decrease
of at least one percent in the number of shares of Common Stock purchasable upon
the exercise of a Warrant and such anti-dilution provisions will not apply to
certain additional limited exceptions.
No Rights as Stockholders
The holders of unexercised Warrants are not entitled, as such, to receive
dividends or other distributions, receive notice of any meeting of the
stockholders, consent to any action of the stockholders, receive notice of any
other stockholder proceedings, or to any other rights as stockholders of the
Company.
Mergers, Consolidations, etc.
Except as provided below, in the event that the Company consolidates with,
merges with or into, or sells all or substantially all of its property and
assets to another person, each Warrant thereafter shall entitle the holder
thereof to receive upon exercise thereof the number of shares of capital stock
or other securities or property which the holder of Common Stock is entitled to
receive upon completion of such consolidation, merger or sale of assets. If the
Company merges or consolidates with, or sells all or substantially all of the
property and assets of the Company to, another person and, in connection
therewith, consideration to the holders of Common Stock in exchange for their
shares is payable solely in cash, or in the event of the dissolution,
liquidation or winding-up of the Company, then the holders of the Warrants will
be entitled to receive distributions on an equal basis with the holders of
Common Stock or other securities issuable upon exercise of the Warrants assuming
the Warrants had been exercised immediately prior to such event, less the
Exercise Price. Upon receipt of such payment, if any, the Warrants will expire
and the rights of the holders thereof will cease. If the Company has made a
Repurchase Offer that has not expired at the time of such transaction, the
holders of the Warrants will be entitled to receive the higher of (i) the amount
payable to the holders of the Warrants described above and (ii) the Repurchase
Price payable to the holders of the Warrants pursuant to such Repurchase Offer.
In case of any such merger, consolidation or sale of assets, the surviving or
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acquiring person and, in the event of any dissolution, liquidation or winding-up
of the Company, the Company must deposit promptly with the Warrant Agent the
funds, if any, necessary to pay to the holders of the Warrants. After such funds
and the surrendered Warrant Certificate are received, the Warrant Agent must
make payment by delivering a check in such amount as is appropriate (or, in the
case of consideration other than cash, such other consideration as is
appropriate) to such person or persons as it may be directed in writing by the
holders surrendering such Warrants.
Registration Requirements
Under the terms of the Warrant Registration Rights Agreement, the holders
of the Warrants will be entitled to piggy-back registration rights for the
Common Stock (or other securities) issuable upon exercise of the Warrants in
connection with (i) an initial public offering of the Common Stock (or other
securities) issuable upon exercise of the Warrants, if any stockholder of the
issuer participates in such public offering, or (ii) certain public offerings of
shares of Common Stock (or other securities) issuable upon exercise of the
Warrants conducted subsequent to the initial public offering of such stock. If
only the Company sells shares in the initial public offering or all of the
Warrant Shares (or other securities issuable upon exercise of the Warrants) are
not sold in the initial public offering or any subsequent offering, the Company
will be required to use its best efforts to cause to be declared effective, no
later than 180 days after the closing date of the initial public offering (but
in no event prior to the first anniversary of the date of original issuance of
the Warrants), the Warrant Registration Statement with respect to the issuance
of the Common Stock (or other securities) issuable upon exercise of the
Warrants. The Company is required to use reasonable efforts to maintain the
effectiveness of the Warrant Registration Statement until the Expiration Date,
or if earlier, such time as all Warrants have been exercised. During any
consecutive 365-day period while the Warrants are exercisable, the Company will
have the ability to suspend the availability of such registration statement for
(a) up to two 30-consecutive-day periods (except during the 30 days immediately
prior to the expiration of the Warrants) if the Company's Board of Directors
determines in good faith that there is a valid purpose for the suspension and
provides notice of such determination to the holders at their addresses
appearing in the register of Warrants maintained by the Warrant Agent and (b)
five additional, non-consecutive three-day periods, except during the 30-day
period immediately prior to the Expiration Date, if the Company's Board of
Directors determines in good faith that the Company cannot provide adequate
disclosure during such period due to circumstances beyond its control. Holders
of Warrants will not be named as selling securityholders in the Warrant
Registration Statement. The Warrant Agreement requires the Company to pay the
expenses associated with such registration.
Reservation of Shares
The Company has authorized and will reserve for issuance such number of
shares of Common Stock as will be issuable upon the exercise of all outstanding
Warrants. Such shares of Common Stock, when issued and paid for in accordance
with the Warrant Agreement, will be duly and validly issued, fully paid and
nonassessable, free of preemptive rights and free from all taxes, liens, charges
and security interests.
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DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of: (i) 102,524 shares
of Common Stock, of which one share has been issued and is outstanding and owned
by Allegiance LLC, 96,000 shares are reserved for issuance upon conversion of
the Preferred Stock, and 1,523 shares are reserved for issuance upon exercise of
the Warrants; and (ii) 96,000 shares of Preferred Stock, of which 95,641.25
shares are issued and outstanding and owned by Allegiance LLC.
COMMON STOCK
Holders of Common Stock of the Company are entitled to one vote for each
share held on all matters submitted to a vote of stockholders. Except as
otherwise required by law, actions at the Company's stockholders meetings
require the affirmative vote of a majority of the shares represented at the
meeting and that a quorum be present. Holders of Common Stock are entitled,
subject to the preferences of the Preferred Stock, to receive such dividends, if
any, as may be declared by the Board of Directors out of funds legally available
therefor. The Indenture restricts the ability of the Company to pay dividends on
the Common Stock. See "Description of the Notes -- Covenants." In addition,
without the prior consent of Allegiance LLC, the Company may not declare or pay
any dividends on its Common Stock. See "Certain Relationships and Related
Transactions -- Stock Purchase Agreement." The holders of Common Stock have no
preemptive, redemption, conversion or sinking fund rights. In the event of a
liquidation, dissolution or winding up of the Company, holders of Common Stock
are entitled to share ratably in the assets of the Company which are legally
available for distribution, if any, remaining after the payment of all debts and
liabilities of the Company and the liquidation preference of any outstanding
Preferred Stock.
At present, there is no established trading market for the Common Stock.
PREFERRED STOCK
The Preferred Stock accrues dividends at a per-annum rate of 12% of the sum
of the Liquidation Value thereof and all accumulated and unpaid dividends
thereon. "Liquidation Value" for any share of Preferred Stock is equal to the
sum of (i) the initial price paid to the Company for such share on its date of
issuance and (ii) the aggregate contributions to the capital of the Company made
pursuant to the Stock Purchase Agreement with respect to such share after its
date of issuance. The Indenture restricts the ability of the Company to pay
dividends on the Preferred Stock. See "Description of the Notes -- Covenants."
Upon any liquidation, dissolution or winding up of the Company (whether
voluntary or involuntary), each holder of Preferred Stock shall be entitled to
be paid, before any distribution or payment is made with respect to any other
class of the Company's capital stock, an amount in cash equal to the aggregate
Liquidation Value of all shares held by such holder plus all accrued and unpaid
dividends thereon (the "Liquidation Payment"). In the event of certain changes
of control of the Company, and upon the election of the holders of a majority of
the Preferred Stock, the holders of Preferred Stock may elect (subject to
certain exceptions) to require the Company to treat such change of control as a
dissolution or liquidation of the Company and receive Liquidation Payments with
respect to their Preferred Stock.
The Preferred Stock is convertible at any time and from time to time
(without credit for accumulated dividends) into shares of Common Stock. The
95,641.25 shares of Preferred Stock outstanding are currently convertible into
95,641.25 shares of the Company's Common Stock, which conversion ratio is
subject to adjustment on a weighted-average basis upon any issuance or deemed
issuance of Common Stock, or securities convertible into or exercisable for
Common Stock, that would otherwise dilute the economic interests of the holders
of Preferred Stock. In addition, the Company can cause the Preferred Stock to be
converted in connection with an IPO, subject to the approval of the holders of a
majority of the Preferred Stock. Holders of Preferred Stock vote with holders of
the Company's Common Stock on an as-if-converted basis.
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REGISTRATION RIGHTS
The Fund Investors, the Management Investors, and the Company are parties
to a registration rights agreement dated as of August 13, 1997 (the
"Registration Agreement"). Under the terms of the Registration Agreement, the
Fund Investors may (subject to Mr. Holland's approval right described above)
require the Company to consummate an IPO. After the IPO, each of Morgan Stanley
Capital Partners, Madison Dearborn Capital Partners, and Frontenac Company are
entitled to demand two long-form registrations and unlimited short-form
registrations, and Battery Ventures is entitled to demand one long-form
registration and unlimited short-form registrations. In addition, the Fund
Investors and the Management Investors may "piggyback" on primary or secondary
registered public offerings of the Company's securities. Each Fund Investor and
Management Investor is subject to holdback restrictions in the event of an IPO
or other public offering of Company Securities. The parties to the Registration
Agreement have agreed to permit the holders of Warrants to "piggyback" on any
registrations under the Registration Agreement.
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CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
The following is a general discussion of the principal United States
federal income tax consequences of an exchange of Old Notes for New Notes and
the ownership and disposition of the New Notes to initial purchasers thereof.
This discussion is based on currently existing provisions of the Code, existing,
temporary and proposed Treasury regulations promulgated thereunder, and
administrative and judicial interpretations thereof, all as in effect or
proposed on the date hereof and all of which are subject to change, possibly
with retroactive effect, or different interpretations. This discussion does not
address the tax consequences to subsequent purchasers of Notes and is limited to
purchasers who acquire the Notes at their issue price and hold such Notes as
capital assets, within the meaning of section 1221 of the Code. Moreover, this
discussion is for general information only and does not address all of the tax
consequences that may be relevant to particular initial purchasers in light of
their personal circumstances or to certain types of initial purchasers, such as
certain financial institutions, insurance companies, tax-exempt entities,
dealers in securities, certain U.S. expatriates, persons who have hedged the
risk of owning a Note or holders whose "functional currency" is not the U.S.
dollar.
As used herein, the term "U.S. Holder" means an initial purchaser of a Note
or Warrant that is, for United States federal income tax purposes, (a) a citizen
or individual resident of the United States, (b) a corporation, partnership or
other entity created or organized in or under the laws of the United States or
any political subdivision thereof (other than any partnership treated as foreign
under U.S. Treasury regulations which may be issued under recently enacted
amendments to the Code), (c) an estate the income of which is subject to United
States federal income taxation regardless of source, or (d) a trust subject to
the primary supervision of a court within the United States and the control of a
United States person, as described in the Code. An individual may, subject to
certain exceptions, be deemed to be a United States resident (as opposed to a
non-resident alien) by virtue of being present in the United States on at least
31 days in the calendar year and for an aggregate of at least 183 days during a
three-year period ending in the current calendar year (counting for such
purposes all of the days present in the current year, one-third of the days
present in the immediately preceding year, and one-sixth of the days present in
the second preceding year). Resident aliens are subject to U.S. federal tax as
if they were U.S. citizens. As used herein, a "Non-U.S. Holder" is a holder that
is not a U.S. Holder.
EXCHANGE OF NOTES
The Company believes that the exchange of Old Notes for New Notes pursuant
to the Exchange Offer will not be treated as an "exchange" for federal income
tax purposes because the New Notes will not be considered to differ materially
in kind or extent from the Old Notes. Rather, the New Notes received by a holder
will be treated as a continuation of the Old Notes in the hands of such holder.
As a result, there will be no federal income tax consequences to holders
exchanging Old Notes for New Notes pursuant to the Exchange Offer.
ALL PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS
TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF THE NOTES, INCLUDING THE APPLICABILITY OF ANY FEDERAL TAX LAWS OR
ANY STATE, LOCAL OR FOREIGN TAX LAWS, AND ANY CHANGES (OR PROPOSED CHANGES) IN
APPLICABLE TAX LAWS OR INTERPRETATIONS THEREOF.
UNITED STATES FEDERAL INCOME TAXATION OF UNITED STATES HOLDERS
Original Issue Discount. Because the Old Notes were sold at a substantial
discount from their principal amount at maturity and because there will not be
any payment of interest on the Notes in the first five years after issuance, the
Old Notes and New Notes (which for tax purposes are treated as a continuation of
the Old Notes) will have original issue discount ("OID") for federal tax
purposes, and U.S. Holders of Notes will be subject to special tax accounting
rules, as described in greater detail below. U.S. Holders of Notes should be
aware that they generally must include OID in gross income for U.S. federal
income tax purposes on an
109
<PAGE> 114
annual basis under a constant yield accrual method regardless of their regular
method of tax accounting. As a result, U.S. Holders will include OID in income
in advance of the receipt of cash attributable to such income. However, U.S.
Holders of the Notes generally will not be required to include separately in
income cash payments received on such notes, even if denominated as interest, to
the extent such payments constitute payments of previously accrued OID.
The Notes will be treated as issued with OID equal to the excess of the
"stated redemption price at maturity" of a Note over its "issue price." The
issue price of a Note is described under "-- Allocation of Purchase Price
Between Notes and Warrants." The stated redemption price at maturity of a Note
is the total of all payments on the Note that are not payments of "qualified
stated interest." A qualified stated interest payment is a payment of stated
interest unconditionally payable, in cash or property (other than debt
instruments of the issuer), at least annually at a single fixed rate during the
entire term of the Note that appropriately takes into account the length of
intervals between payments. Because there will not be any payment of interest on
the Notes in the first five years after issuance, none of the payments on the
Notes will constitute qualified stated interest. Accordingly, all payments on
the Notes will be treated as part of the Notes' stated redemption price at
maturity.
The amount of OID includible in income by an initial U.S. Holder of a Note
is the sum of the "daily portions" of OID with respect to the Note for each day
during the taxable year or portion thereof in which such U.S. Holder holds such
Note ("accrued OID"). The daily portion is determined by allocating to each day
in any "accrual period" a pro-rata portion of the OID that accrued in such
period. The "accrual period" for a Note will generally be the semi-annual period
between interest payment dates, but may be of any length and may vary in length
over the term of an OID note, provided that each accrual period is no longer
than one year and each scheduled payment of principal or interest occurs either
on the first or last day of an accrual period. The amount of OID that accrues
with respect to any accrual period is the excess of (a) the product of the
Note's adjusted issue price at the beginning of such accrual period and its
yield to maturity, determined on the basis of compounding at the close of each
accrual period and properly adjusted for the length of such period, over (b) the
amount of qualified stated interest allocable to such accrual period). The
"adjusted issue price" of a Note at the start of any accrual period is equal to
its issue price increased by the accrued OID for each prior accrual period and
reduced by any prior payments made on such Note (other than payments of
qualified stated interest).
Notes may be redeemed prior to their stated maturity at the option of the
Company. For purposes of computing the yield of such instruments, the Company
will be deemed to exercise or not exercise its option to redeem the Notes in a
manner that minimizes the yield on the Notes. In the event the Company were
deemed to exercise its option to redeem, yield to maturity and all related OID
computations would be made by treating the deemed redemption date as the
maturity date of the Note and the amount payable on redemption as the principal
amount of the Note. In that event, if the Note were in fact not redeemed on such
date, appropriate adjustments would be made for purposes of future OID accruals.
It is not anticipated that the Company's option to redeem the Notes prior to
stated maturity will be treated as exercised.
Redemption, Sale, Exchange or Retirement of the Notes. In general, a U.S.
Holder will recognize gain or loss on the redemption, sale, exchange or
retirement of the Notes equal to the difference between the amount realized on
the redemption, sale, exchange or retirement (except to the extent such amount
is attributable to accrued but unpaid interest, which will be taxable as
ordinary income) and such U.S. Holder's adjusted tax basis in the Note. A U.S.
Holder's adjusted tax basis in the Note will be its cost to such U.S. Holder,
increased by the amount of any OID previously included in the U.S. Holder's
income and reduced by the amount of any cash payments on the Note other than
payments of qualified stated interest. As a general rule (with the exception of,
among other things, amounts attributable to accrued but unpaid interest), such
gain or loss recognized on the redemption, sale, exchange or retirement of the
Notes will be capital gain or loss. With respect to individuals, gain is subject
to reduced rates of tax if the Note was held for more than twelve months and is
subject to further reduced rates if the Note was held for more than eighteen
months, in each case as of the date of redemption, sale, exchange or retirement.
Applicable High-Yield Discount Obligations. The Notes will be treated as
"applicable high-yield discount obligations" ("AHYDOs") for U.S. federal income
tax purposes. An AHYDO is a debt instrument
110
<PAGE> 115
that has a yield-to-maturity, computed as of its issue date, that equals or
exceeds the sum of (i) the "applicable federal rate" (the "AFR") in effect for
the month in which the Notes are issued (for February 1998, the AFR is 5.84%,
assuming semi-annual compounding) and (ii) 5.0%, and that bears "significant"
OID (as determined under a formula prescribed in the Code). Because the Notes
are AHYDOS, the Company will not be allowed to deduct OID accrued on the Notes
until such time as the Company actually pays such OID.
Moreover, to the extent that the yield to maturity on the Notes exceeds the
sum of the AFR and 6.0% (such excess referred to herein as the "Disqualified
Yield"), the deduction for OID accrued on the Notes would be permanently
disallowed (regardless of whether the Company actually paid such OID) to the
extent such OID is attributable to such Disqualified Yield ("Dividend-Equivalent
Interest"). For purposes of the dividend-received deduction generally available
to corporations, such Dividend-Equivalent Interest will be treated as a dividend
to Holders to the extent it is deemed to have been paid out of the Company's
current or accumulated earnings and profits. U.S. Holders that are corporations
should consult with their own tax advisors as to the applicability of the
dividends received deduction.
UNITED STATES FEDERAL INCOME TAXATION OF NON-U.S. HOLDERS
Under present U.S. federal income and estate tax law and subject to the
discussion of backup withholding below:
(i) payments of principal, premium (if any) and interest on a Note by
the Company or any agent of the Company to any Non-U.S. Holder will not be
subject to withholding of U.S. federal income tax, provided that, in the
case of interest (1) the Non-U.S. Holder does not actually or
constructively own 10.0% or more of the total combined voting power of all
classes of stock of the Company entitled to vote, (2) the Non-U.S. Holder
is not (x) a controlled foreign corporation that is related to the Company
through stock ownership, or (y) a bank receiving interest described in
Section 881(c)(3)(A) of the Code, and (3) either (A) the beneficial owner
of the Note certifies to the Company or its agent, under penalties of
perjury, that it is not a "United States person" (as defined in the Code)
and provides its name and address, or (B) a securities clearing
organization, bank or other financial institution that holds customers'
securities in the ordinary course of its trade or business (a "financial
institution") and holds the Note on behalf of the beneficial owner
certifies to the Company or its agent under penalties of perjury that such
statement has been received from the beneficial owner by it or by the
financial institution between it and the beneficial owner and furnishes the
payor with a copy thereof;
(ii) a Non-U.S. Holder will not be subject to U.S. federal income tax
on gain realized on the sale, exchange, redemption, retirement at maturity
or other disposition of a Note (other than any such gain in respect of
accrued interest) unless (1) such holder is an individual who is present in
the United States for 183 days or more during the taxable year and certain
other conditions are met, or (2) the gain is effectively connected with a
U.S. trade or business of the holder, and if an income tax treaty applies,
is generally attributable to a U.S. "permanent establishment" maintained by
the holder;
(iii) a Note held by an individual who at the time of death is not a
citizen or resident of the United States will not be subject to U.S.
federal estate tax as a result of such individual's death if, at the time
of such death, (1) the individual did not actually or constructively own 10
percent or more of the total combined voting power of all classes of stock
of the Company entitled to vote, and (2) the income on the Note would not
have been effectively connected with the conduct of a trade or business by
the individual in the United States; and
If a Non-U.S. Holder is engaged in a trade or business in the United
States, and interest on the Note or gain realized on the sale, exchange or other
disposition of the Note is effectively connected with the conduct of such trade
or business (and, if an income tax treaty applies, the Non-U.S. Holder maintains
a U.S. "permanent establishment" to which the interest or gain is generally
attributable), the Non-U.S. Holder, although exempt from the withholding tax
discussed in the preceding paragraph (i) (provided that such holder furnishes a
properly executed Internal Revenue Service ("IRS") Form 4224 or successor form
on or
111
<PAGE> 116
before any payment date to claim such exemption), may be subject to U.S. federal
income tax on such interest or gain on a net basis in the same manner as if it
were a U.S. Holder.
In addition, a foreign corporation that is a Non-U.S. Holder of a Note may
be subject to a branch profits tax equal to 30.0% of its effectively connected
earnings and profits for the taxable year, subject to certain adjustments,
unless it qualifies for a lower rate under an applicable tax treaty. For this
purpose, interest on a Note or gain on the disposition of a Note will be
included in earnings and profits if such interest or gain is effectively
connected with the conduct by the foreign corporation of a trade or business in
the United States.
Recently finalized Treasury regulations pertaining to U.S. federal
withholding tax, generally effective for payments made after December 31, 1998
(the "Final Withholding Tax Regulations"), will provide alternative methods for
satisfying the certification requirement described in paragraph (i)(3) above and
will require a Non-U.S. Holder which provides an IRS Form 4224 or successor form
(as discussed above) to also provide its U.S. taxpayer identification number.
The Final Withholding Tax Regulations generally also will require, in the case
of a Note held by a foreign partnership, that (x) the certification described in
paragraph (i)(3) above be provided by the partners and (y) the partnership
provide certain information, including a U.S. taxpayer identification number. A
look-through rule will apply in the case of tiered partnerships.
With respect to a Foreign Holder subject to U.S. federal income taxation
under the circumstances described above in paragraph (ii), exchange of an Old
Note for a New Note should not be subject to U.S. federal income tax.
Non-U.S. Holders should consult with their tax advisors regarding U.S. and
foreign tax consequences with respect to the Notes.
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, information reporting requirements will apply to certain
payments made in respect of a Note made to U.S. Holders other than certain
exempt recipients (such as corporations). A 31.0% backup withholding tax will
apply to such payments if the U.S. Holder fails to provide a correct taxpayer
identification number or certification of exempt status or, with respect to
certain payments, the U.S. Holder fails to report in full all dividend and
interest income and the IRS notifies the payor of such underreporting.
Under current Treasury Regulations, backup withholding and information
reporting will not apply to payments made by the Company or any agent thereof
(in its capacity as such) to a Non-U.S. Holder of a Note if such holder has
provided the required certification that it is not a United States person as set
forth in paragraph (i) under "United States Federal Income Taxation of Foreign
Holders," provided that neither the Company nor its agent has actual knowledge
that the holder is a United States person. The Company or its agent may,
however, report (on IRS Form 1042S) payments of interest on the Notes.
Payment of the proceeds from the disposition of a Note made to or through a
foreign office of a broker will not be subject to information reporting or
backup withholding, except that if the broker is a United States person, a
controlled foreign corporation for U.S. tax purposes or a foreign person 50.0%
or more of whose gross income from all sources for the three-year period ending
with the close of its taxable year preceding the payment was effectively
connected with a U.S. trade or business, information reporting may apply to such
payments. Payments of the proceeds from a disposition of a Note made to or
through the U.S. office of a broker is subject to information reporting and
backup withholding unless the holder or beneficial owner certifies as to its
taxpayer identification number or otherwise establishes an exemption from
information reporting and backup withholding.
In general, the Final Withholding Tax Regulations do not significantly
alter the current substantive backup withholding and information reporting
requirements but unify current certification procedures and clarify reliance
standards. Under the Final Withholding Tax Regulations, special rules apply
which permit the shifting of primary responsibility for withholding to certain
financial intermediaries acting on behalf of beneficial owners. A holder of a
Note should consult with its tax advisor regarding the application of the backup
withholding rules to its particular situation, the availability of an exemption
therefrom, the procedure
112
<PAGE> 117
for obtaining such an exemption, if available, and the impact of the Final
Withholding Tax Regulations on payments made with respect to Notes after
December 31, 1998.
Any amounts withheld under the backup withholding rules from a payment to a
holder would be allowed as a refund or a credit against such holder's U.S.
federal income tax liability, provided the required information is furnished to
the IRS.
PLAN OF DISTRIBUTION
Each Participating Broker-Dealer that receives New Notes for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
Prospectus in connection with any resale of such New Notes. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
Participating Broker-Dealer in connection with resales of New Notes received in
exchange for Old Notes where such Old Notes were acquired as a result of
market-making activities or other trading activities. The Company has agreed
that for a period of 180 days after the Expiration Date, it will make this
Prospectus, as amended or supplemented, available to any Participating
Broker-Dealer for use in connection with any such resale. In addition, until
, 1998 (90 days after the commencement of the Exchange Offer), all
dealers effecting transactions in the New Notes, whether or not participating in
this distribution, may be required to deliver a Prospectus.
The Company will not receive any proceeds from any sales of the New Notes
by Participating Broker-Dealers. New Notes received by Participating
Broker-Dealers for their own accounts pursuant to the Exchange Offer may be sold
from time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the New Notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such Participating Broker-Dealer and/or the purchasers of
any such New Notes. Any Participating Broker-Dealer that resells the New Notes
that were received by it for its own account pursuant to the Exchange Offer and
any broker or dealer that participates in a distribution of such New Notes may
be deemed to be an "underwriter" within the meaning of the Securities Act and
any profit on any such resale of New Notes and any commissions or concessions
received by any such persons may be deemed to be underwriting compensation under
the Securities Act. The Letter of Transmittal states that by acknowledging that
it will deliver and by delivering a Prospectus, a Participating Broker-Dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act.
For a period of 180 days after the Expiration Date, the Company will
promptly, upon request and in no event more than five business days after such
request, send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any Participating Broker-Dealer that requests
such documents in the Letter of Transmittal.
LEGAL MATTERS
The validity of the New Notes offered hereby will be passed upon for the
Company by Kirkland & Ellis (a partnership including professional corporations),
Chicago, Illinois.
EXPERTS
The consolidated balance sheets of the Company as of March 31, 1998 and
December 31, 1997, and the related consolidated statements of operations,
stockholders' deficit, and cash flows for the three months ended March 31, 1998
and for the period from inception (April 22, 1997) to December 31, 1997, have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto and are included herein in
reliance upon the authority of said firm as experts in giving said report.
113
<PAGE> 118
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheet as of March 31, 1998 and December
31, 1997.................................................. F-3
Consolidated Statement of Operations for the three months
ended March 31, 1998 and the period from Inception (April
22, 1997) through December 31, 1997....................... F-4
Consolidated Statement of Stockholders' Deficit for the
three months ended March 31, 1998 and the period from
Inception (April 22, 1997) through December 31, 1997...... F-5
Consolidated Statement of Cash Flows for the three months
ended March 31, 1998 and the period from Inception (April
22, 1997) through December 31, 1997....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 119
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Allegiance Telecom, Inc.:
We have audited the accompanying consolidated balance sheets of Allegiance
Telecom, Inc. (a Delaware corporation) and subsidiaries (the "Company") as of
March 31, 1998 and December 31, 1997, and the related consolidated statements of
operations, stockholders' deficit and cash flows for the three months ended
March 31, 1998, and for the period from inception (April 22, 1997) to December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Allegiance Telecom, Inc. and
subsidiaries as of March 31, 1998 and December 31, 1997, and the results of its
operations and its cash flows for the three months ended March 31, 1998, and for
the period from inception to December 31, 1997, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
April 24, 1998
F-2
<PAGE> 120
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
MARCH 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $221,678,116 $ 5,726,359
Short-term investments.................................... 35,916,586 --
Accounts receivable....................................... 307,430 4,310
Prepaid expenses and other current assets................. 396,460 245,152
------------ -----------
Total current assets.............................. 258,298,592 5,975,821
PROPERTY AND EQUIPMENT:
Property and equipment.................................... 32,890,448 23,912,659
Accumulated depreciation and amortization................. (221,063) (12,639)
------------ -----------
Property and equipment, net....................... 32,669,385 23,900,020
OTHER NON-CURRENT ASSETS:
Deferred debt issuance costs (net of accumulated
amortization of $100,793).............................. 9,034,603 --
Other assets.............................................. 225,112 171,173
------------ -----------
Total other non-current assets.................... 9,259,715 171,173
------------ -----------
Total assets...................................... $300,227,692 $30,047,014
============ ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable.......................................... $ 2,333,531 $ 2,261,690
Accrued liabilities and other............................. 3,280,886 1,668,010
Deferred revenue.......................................... 68,221 --
------------ -----------
Total current liabilities......................... 5,682,638 3,929,700
LONG-TERM DEBT.............................................. 247,329,420 --
REDEEMABLE CUMULATIVE CONVERTIBLE PREFERRED STOCK:
Redeemable cumulative convertible preferred stock -- $.01
par value, 96,000 and 95,000 shares authorized,
95,641.25 and 95,000 shares issued and outstanding at
March 31, 1998, and December 31, 1997, respectively.... 52,350,623 30,455,214
Preferred stock subscriptions receivable.................. (275,000) --
------------ -----------
Total redeemable cumulative convertible preferred
stock.......................................... 52,075,623 30,455,214
REDEEMABLE WARRANTS......................................... 8,183,550 --
COMMITMENTS AND CONTINGENCIES (see Notes 5 and 7)
STOCKHOLDERS' DEFICIT:
Common stock -- $.01 par value, 102,524 and 100,001 shares
authorized, 1 share issued and outstanding at March 31,
1998, and December 31, 1997............................ -- --
Additional paid-in capital................................ 100 100
Accumulated deficit....................................... (13,043,639) (4,338,000)
------------ -----------
Total stockholders' deficit....................... (13,043,539) (4,337,900)
------------ -----------
Total liabilities and stockholders' deficit....... $300,227,692 $30,047,014
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 121
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
THREE MONTHS (APRIL 22, 1997),
ENDED THROUGH
MARCH 31, DECEMBER 31,
1998 1997
------------ -----------------
<S> <C> <C>
REVENUES.................................................... $ 202,925 $ 403
OPERATING EXPENSES:
Technical................................................. 234,831 151,269
Selling................................................... 689,778 22,844
General and administrative................................ 4,011,312 3,403,068
Depreciation and amortization............................. 208,424 12,639
----------- -----------
Total operating expenses.......................... 5,144,345 3,589,820
----------- -----------
Loss from operations.............................. (4,941,420) (3,589,417)
OTHER (EXPENSE) INCOME:
Interest income........................................... 2,194,226 111,417
Interest expense.......................................... (4,669,079) --
----------- -----------
Total other (expense) income...................... (2,474,853) 111,417
----------- -----------
NET LOSS.................................................... (7,416,273) (3,478,000)
REDEEMABLE PREFERRED STOCK DIVIDENDS........................ (1,289,366) (860,000)
----------- -----------
NET LOSS APPLICABLE TO COMMON STOCK......................... $(8,705,639) $(4,338,000)
=========== ===========
NET LOSS PER SHARE, basic and diluted....................... $(8,705,639) $(4,338,000)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 122
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK
------------------ ADDITIONAL
NUMBER OF PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- ------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, April 22, 1997 (date of
inception).......................... -- $ -- $ -- $ -- $ --
Issuance of common stock at $100 per
share............................ 1 -- 100 -- 100
Redeemable preferred stock
dividends........................ -- -- -- (860,000) (860,000)
Net loss............................ -- -- -- (3,478,000) (3,478,000)
-- ---- ---- ------------ ------------
BALANCE, December 31, 1997............ 1 -- 100 (4,338,000) (4,337,900)
Redeemable preferred stock
dividends........................ -- -- -- (1,289,366) (1,289,366)
Net loss............................ -- -- -- (7,416,273) (7,416,273)
-- ---- ---- ------------ ------------
BALANCE, March 31, 1998............... 1 $ -- $100 $(13,043,639) $(13,043,539)
== ==== ==== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 123
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(APRIL 22,
THREE MONTHS 1997),
ENDED THROUGH
MARCH 31, DECEMBER 31,
1998 1997
------------ ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (7,416,273) $ (3,478,000)
Adjustments to reconcile net loss to net cash used in
operating activities --
Depreciation and amortization.......................... 208,424 12,639
Accretion of senior discount notes..................... 4,568,286 --
Amortization of deferred debt issuance costs........... 100,793 --
Changes in assets and liabilities --
Accounts receivable.................................. (303,120) (4,310)
Prepaid expenses and other current assets............ (151,308) (245,152)
Other assets......................................... (53,939) (171,173)
Accounts payable..................................... 416,907 275,089
Accrued liabilities and other........................ 366,445 1,668,010
Deferred revenue..................................... 68,221 --
------------ ------------
Net cash used in operating activities............. (2,195,564) (1,942,897)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (7,608,890) (21,926,058)
Short-term investments.................................... (35,916,586) --
------------ ------------
Net cash used in investing activities.................. (43,525,476) (21,926,058)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from senior discount notes....................... 242,293,600 --
Proceeds from issuance of warrants........................ 8,183,550 --
Debt issuance costs....................................... (9,135,396) --
Proceeds from issuance of redeemable preferred stock...... -- 5,000,000
Proceeds from redeemable capital contributions............ 20,331,043 24,595,214
Proceeds from issuance of common stock.................... -- 100
------------ ------------
Net cash provided by financing activities......... 261,672,797 29,595,314
------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS....................... 215,951,757 5,726,359
CASH AND CASH EQUIVALENTS, beginning of period.............. 5,726,359 --
------------ ------------
CASH AND CASH EQUIVALENTS, end of period.................... $221,678,116 $ 5,726,359
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 124
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND DECEMBER 31, 1997
1. GENERAL:
Allegiance Telecom, Inc., a competitive local exchange carrier ("CLEC"),
was incorporated on April 22, 1997, as a Delaware corporation for the purpose of
providing voice, data, and Internet services to business, government, and other
institutional users in major metropolitan areas across the United States.
Allegiance Telecom, Inc. and its subsidiaries are referred to herein as the
"Company." The consolidated financial statements of the Company include the
accounts of Allegiance Telecom, Inc., Allegiance Telecom Service Corporation,
Allegiance Telecom of California, Inc., Allegiance Telecom of Georgia, Inc.,
Allegiance Telecom of Illinois, Inc., Allegiance Telecom of New Jersey, Inc.,
Allegiance Telecom of New York, Inc., Allegiance Telecom of Texas, Inc., and
Allegiance Telecom International, Inc. Each of these companies is a wholly owned
subsidiary of Allegiance Telecom, Inc.
The Company plans two phases of development, the first to offer services in
12 of the largest U.S. metropolitan areas and the second to offer services in 12
additional large metropolitan areas in the U.S. The Company is currently
developing its networks in six markets: New York City, Dallas, Atlanta, Chicago,
Los Angeles, and San Francisco. During December 1997, the Company began
providing service in Dallas. Initial facilities-based service for the New York
City market began in the first quarter of 1998. Initial facilities-based
services for the Dallas and Atlanta markets are scheduled to begin in the second
quarter of 1998, for the Chicago and Los Angeles markets in the third quarter of
1998, and for the San Francisco and Boston markets in the fourth quarter of
1998. The Company is planning to begin services in an additional six markets in
the second half of 1998 and early 1999. The build-out of the second phase will
be dependent upon the Company obtaining additional financing.
Until December 16, 1997, the Company was in the development stage. Since
its inception on April 22, 1997, the Company's principal activities have
included developing its business plans, procuring governmental authorizations,
raising capital, hiring management and other key personnel, working on the
design and development of its local exchange telephone networks and operations
support systems ("OSS"), acquiring equipment and facilities and negotiating
interconnection agreements. Accordingly, the Company has incurred operating
losses and operating cash flow deficits.
The Company's success will be affected by the problems, expenses, and
delays encountered in connection with the formation of any new business, and the
competitive environment in which the Company intends to operate. The Company's
performance will further be affected by its ability to assess potential markets,
secure financing or raise additional capital, implement expanded interconnection
and collocation with incumbent local exchange carrier ("ILEC") facilities, lease
adequate trunking capacity from ILECs or other CLECs, purchase and install
switches in additional markets, implement efficient OSS and other back office
systems, develop a sufficient customer base, and attract, retain, and motivate
qualified personnel. The Company's networks and the provisions of
telecommunications services are subject to significant regulation at the
federal, state, and local levels. Delays in receiving required regulatory
approvals or the enactment of new adverse regulation or regulatory requirements
may have a material adverse effect upon the Company. Although management
believes that the Company will be able to successfully mitigate these risks,
there is no assurance that the Company will be able to do so or that the Company
will ever operate profitably.
Expenses are expected to exceed revenues in each location in which the
Company offers service until a sufficient customer base is established. It is
anticipated that obtaining a sufficient customer base will take a number of
years, and positive cash flows from operations are not expected in the near
future.
F-7
<PAGE> 125
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CONSOLIDATION
The accompanying financial statements include the accounts of Allegiance
Telecom, Inc. and its wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, the Company includes as cash and cash
equivalents, cash, marketable securities and commercial paper with original
maturities of three months or less.
SHORT-TERM INVESTMENTS
Short-term investments consist primarily of commercial paper with original
maturities at date of purchase beyond three months and less than 12 months. Such
short-term investments are carried at their accreted value, which approximates
fair value, due to the short period of time to maturity.
ACCOUNTS RECEIVABLE
Accounts receivable consists of end user receivables, interest receivable,
and at December 31, 1997, a receivable from an employee.
PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of prepaid rent, prepaid
insurance, and refundable deposits. Prepayments are expensed on a straight-line
basis over the life of the underlying agreements.
PROPERTY AND EQUIPMENT
Property and equipment includes switches, office equipment, furniture and
fixtures, and construction-in-progress of switches and leasehold improvements.
These assets are stated at cost, which includes direct costs, labor, overhead
and interest expense capitalized and are depreciated once placed in service
using the straight-line method. Interest expense for the three months ended
March 31, 1998 was $5,136,613 before the capitalization of $467,534 of interest
expense related to construction-in-progress. The estimated useful lives of
office equipment, furniture and fixtures, leasehold improvements and switches
are two, five, and seven years, respectively. Repair and maintenance costs are
expensed as incurred. Property and equipment at March 31, 1998, and December 31,
1997, consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
<S> <C> <C>
Construction-in-progress switches......................... $10,774,433 $19,989,924
Construction-in-progress leasehold improvements........... 521,546 2,458,728
Construction-in-progress office equipment................. 3,272,779 1,186,457
Switches.................................................. 13,835,717 --
Leasehold improvements.................................... 3,696,150 37,466
Office equipment.......................................... 583,560 89,855
Furniture and fixtures.................................... 206,263 150,229
Less: Accumulated depreciation............................ (221,063) (12,639)
----------- -----------
Property and equipment, net............................... $32,669,385 $23,900,020
=========== ===========
</TABLE>
In October 1997, the Company acquired digital switches in New York City and
Atlanta and certain furniture and fixtures from US ONE Communications for an
aggregate purchase price of approximately
F-8
<PAGE> 126
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$19.3 million. Operating and application software costs for both network and
administration systems are capitalized and amortized over the estimated life of
the system, which approximates five years.
REVENUE RECOGNITION
Revenue is recognized in the month in which the service is provided. All
expenses related to services provided are recognized as incurred. Deferred
revenue represents advance billings for services not yet performed. Such revenue
is deferred and recognized in the month in which the service is provided.
USE OF ESTIMATES IN FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of expenses during the reporting period.
Actual results could differ from those estimates.
EARNINGS PER SHARE
The net loss per share amount reflected on the statement of operations is
based upon the weighted average number of common shares outstanding of one
share. The preferred shares, warrants and options were not included in the net
loss per share calculation as the effect from the conversion would be
antidilutive (see Note 3). The net loss applicable to common stock at March 31,
1998, and December 31, 1997, includes preferred stock dividends in arrears of
$2,149,366 and $860,000, respectively.
RECLASSIFICATIONS
Certain amounts in the prior period's consolidated financial statements
have been reclassified to conform with the current period presentation.
3. CAPITALIZATION:
STOCK PURCHASE AGREEMENT AND SECURITY HOLDERS AGREEMENT
On August 13, 1997, the Company entered into a stock purchase agreement
with Allegiance Telecom, L.L.C. ("Allegiance LLC") (see Note 6). Allegiance LLC
purchased 95,000 shares of 12% redeemable cumulative convertible Preferred Stock
par value $.01 per share ("Initial Closing") and agreed to make additional
contributions as necessary to fund expansion into new markets ("Subsequent
Closings"). In order to obtain funds through Subsequent Closings, the Company
must submit a proposal to Allegiance LLC detailing the funds necessary to build
out the Company's business in a new market. Allegiance LLC is not required to
make any contributions until the proposal has been approved by Allegiance LLC.
The maximum commitment of Allegiance LLC is $100 million and no capital
contributions are required to be made after the Company consummates an initial
public offering of its stock (see Note 10). As of March 31, 1998, and December
31, 1997, Allegiance LLC has contributed a total of $49.9 million and $29.6
million, respectively. At any time and from time to time after August 13, 2004,
but not after the consummation of a public offering (see Note 10) or sale of the
Company, each security holder in Allegiance LLC shall have the right to require
Allegiance LLC to repurchase all of the outstanding securities held by such
security holder at the greater of the original cost for such security and the
fair market value as defined in the security holders agreement. The original
cost shall be equal to the contributions made to Allegiance LLC together with
interest thereon at 12% per annum. Twenty-three days after the issuance of a
Repurchase Notice (as defined in the LLC Agreement), the security holders may
have the fair value of their securities determined. Fair market value is defined
as the amount agreed to be the fair market value by the LLC, the majority of the
Fund Investors, and the majority of the Management Investors. If mutual
agreement cannot be reached, fair market value for (a) publicly traded
F-9
<PAGE> 127
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
securities generally means the average of the closing prices of such securities
for the 21 day period after the filing of the Repurchase Notice and (b)
non-publicly traded securities, a valuation determined by an appraisal
mechanism. In the event the repurchase provisions are exercised, the Company has
agreed, at the request and direction of Allegiance LLC, to take any and all
actions necessary, including declaring and paying dividends and repurchasing
preferred or common stock to enable Allegiance LLC to satisfy its repurchase
obligations. Accordingly, the Company is accruing the cumulative but undeclared
dividends under the Preferred Stock to reflect the minimum value payable in the
event the repurchase provisions are exercised.
REDEEMABLE CUMULATIVE CONVERTIBLE PREFERRED STOCK
As of March 31, 1998, and December 31, 1997, the Company had authorized
96,000 and 95,000 shares, respectively of 12% redeemable cumulative convertible
Preferred Stock ("Preferred Stock"), par value $.01 per share. Each share is
convertible into shares of the Company's common stock with a par value of $.01
per share (the "Common Stock"). Each share of Preferred Stock is currently
convertible into Common Stock on a 1:1 basis, subject to certain antidilution
provisions. No dividends were declared in 1998 or in 1997. As of March 31, 1998,
and December 31, 1997, the Company had accrued Preferred Stock dividends of
approximately $22.60 and $9.05 per share, $2,149,366 and $860,000 in the
aggregate, to reflect the minimum repurchase value of the Preferred Stock.
On August 13, 1997, as a result of the Initial Closing, 95,000 shares of
Preferred Stock were issued at a per share price of $52.63, for an aggregate
price of $5 million.
Capital contributed in the Subsequent Closings occurring in October 1997
and January 1998, and other capital contributions totaled approximately $45.2
million.
On February 25, 1998, the Company issued 522.50 shares of Preferred Stock.
The Preferred Stock was issued at a per share price of $526.32, for an aggregate
price of $275,000 which is recorded as a subscription receivable on the balance
sheet.
On March 13, 1998, the Company issued 118.75 shares of Preferred Stock. The
Preferred Stock was issued at a per share price of $526.32, for an aggregate
price of $62,500.
COMMON STOCK
As of December 31, 1997, the Company had authorized 100,001 shares of $.01
par value Common Stock. One share was issued and outstanding at March 31, 1998,
and December 31, 1997. In February 1998, the Company increased the number of
authorized shares of Common Stock to 102,524 shares. Of the authorized but
unissued Common Stock, 96,000 shares are reserved for issuance upon conversion
of Preferred Stock, 5,000 shares are reserved for issuance upon exercise of
stock options issued under the Stock Option Plan (see Note 9) and 1,523 shares
are reserved for issuance, sale, and delivery upon the exercise of warrants (see
Note 4).
4. LONG-TERM DEBT:
On February 3, 1998, the Company raised gross proceeds of approximately
$250.5 million in an offering of 445,000 Units (the "Unit Offering"), each of
which consists of one 11 3/4% Senior Discount Note due 2008 of the Company (the
"11 3/4% Notes") and one warrant to purchase .0034224719 shares of Common Stock
(the "Redeemable Warrants") at an exercise price of $.01 per share, subject to
certain antidilution provisions. Of the gross proceeds, $242.3 million was
allocated to the initial accreted value of the 11 3/4% Notes and $8.2 million
was allocated to the Redeemable Warrants. The Redeemable Warrants are separately
transferable and are exercisable at any time beginning February 3, 1999, through
their expiration on February 3, 2008. The Redeemable Warrants will also become
exercisable in connection with a public equity
F-10
<PAGE> 128
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
offering. The 11 3/4% Notes have a principal amount at maturity of $445.0
million and an effective interest rate of 12.45%. The 11 3/4% Notes mature on
February 15, 2008. From and after February 15, 2003, interest on the 11 3/4%
Notes will be payable semi-annually in cash at the rate of 11 3/4% per annum.
The fair market value of the Redeemable Warrants was determined based upon
estimates of the fair value of the Common Stock the Redeemable Warrants could be
used to acquire and the achievement of an effective interest rate on the 11 3/4%
Notes of 12.45% required to sell the Units.
The Company must make an offer to purchase the Redeemable Warrants for cash
at the Relevant Value upon the occurrence of a Repurchase Event. A Repurchase
Event is defined to occur when (i) the Company consolidates with or merges into
another person if the Common Stock thereafter issuable upon exercise of the
Redeemable Warrants is not registered under the Securities Exchange Act of 1934,
as amended (the "Exchange Act") or (ii) the Company sells all or substantially
all of its assets to another person, if the Common Stock thereafter issuable
upon the exercise of the Redeemable Warrants is not registered under the
Exchange Act, unless the consideration for such a transaction is cash. The
Relevant Value is defined to be the fair market value of the Common Stock as
determined by the trading value of the securities if publicly traded or at an
estimated fair market value without giving effect to any discount for lack of
liquidity, lack of registered securities, or the fact that the securities
represent a minority of the total shares outstanding.
The 11 3/4% Notes are redeemable by the Company, in whole or in part,
anytime on or after February 15, 2003, at 105.875% of their principal amount at
maturity, plus accrued and unpaid interest, declining to 100% of their principal
amount at maturity, plus accrued and unpaid interest on and after February 15,
2006. In addition, at any time prior to February 15, 2001, the Company may, at
its option, redeem up to 35% of the principal amount at maturity of the 11 3/4%
Notes in connection with a public equity offering at 111.750% of the accreted
value on the redemption date; provided that at least $289.3 million aggregate
principal amount at maturity of the 11 3/4% Notes remains outstanding after such
redemption.
The 11 3/4% Notes carry certain restrictive covenants that, among other
things, limit the ability of the Company to incur indebtedness, pay dividends,
issue or sell capital stock, create liens, sell assets, and enter into
transactions with any holder of 5% or more of any class of capital stock of the
Company or any of its affiliates. The Company was in compliance with all such
restrictive covenants at March 31, 1998.
5. LEGAL MATTERS:
On August 29, 1997, WorldCom, Inc. ("WorldCom") sued the Company and two
individual employees. In its complaint, WorldCom alleges that these employees
violated certain noncompete and nonsolicitation agreements by accepting
employment with the Company and by soliciting then current WorldCom employees to
leave WorldCom's employment and join the Company. In addition, WorldCom claims
that the Company tortiously interfered with WorldCom's relationships with its
employees, and that the Company's behavior constituted unfair competition.
WorldCom seeks injunctive relief and damages, although it has filed no motion
for a temporary restraining order or preliminary injunction. The Company denies
all claims and will vigorously defend itself. The Company does not expect the
ultimate outcome to have a material adverse effect on the results of operations
or financial condition of the Company and an estimate of possible loss cannot be
made at this time.
On October 7, 1997, the Company filed a counterclaim against WorldCom for,
among other things, attempted monopolization of the "one stop shopping"
telecommunications market, abuse of process, and unfair competition. WorldCom
did not move to dismiss the attempted monopolization claim, but has moved to
dismiss the abuse of process and unfair competition claims. On March 4, 1998,
the court dismissed the claim for unfair competition.
F-11
<PAGE> 129
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. RELATED PARTIES:
The Company is a majority owned subsidiary of Allegiance LLC. As of March
31, 1998, and December 31, 1997, Allegiance LLC has made aggregate capital
contributions to the Company of approximately $49.9 million and $29.6 million,
respectively. Allegiance LLC may continue to make additional capital
contributions to the Company as discussed in Note 3 to these financial
statements, but no such contributions will be required after the Company
consummates an initial public offering of its stock. Certain investors in
Allegiance LLC are also employees of the Company. Upon an initial public
offering by the Company, a sale of the Company or liquidation or dissolution of
the Company, Allegiance LLC will dissolve and its assets (which are expected to
consist almost entirely of capital stock of the Company) will be distributed to
the institutional investors and employee investors of Allegiance LLC in
accordance with an allocation formula calculated immediately prior to such
dissolution. The Company will account for any increase in the allocation of
assets to the employee investors in Allegiance LLC in accordance with generally
accepted accounting principles and SEC regulations in effect at the time of such
increase, and this will result in a charge to the Company's earnings (see Note
10). During 1998 and 1997, the Company paid all organizational and legal fees of
Allegiance LLC, the amount of which was not material. As of March 31, 1998, and
December 31, 1997, the Company had accrued but undeclared Redeemable Preferred
Stock dividends of $2,137,766 and $860,000, respectively, payable to Allegiance
LLC (see Note 3). No amounts are due from Allegiance LLC at March 31, 1998, or
December 31, 1997.
In connection with the Unit Offering (see Note 4), the Company incurred
approximately $4.4 million in fees to an affiliate of an investor in Allegiance
LLC.
7. COMMITMENTS AND CONTINGENCIES:
The Company has entered into various operating lease agreements, with
expirations through 2007, for office space and equipment. Future minimum lease
obligations related to the Company's operating leases as of March 31, 1998 are
as follows:
<TABLE>
<S> <C>
1998............................................. $1,199,679
1999............................................. 1,588,907
2000............................................. 1,597,751
2001............................................. 1,160,961
2002............................................. 1,119,128
Thereafter....................................... 4,743,351
</TABLE>
Total rent expense for the three months ended March 31, 1998, was $331,862
and for the period from inception (April 22, 1997), to December 31, 1997, was
$212,053.
In October 1997, the Company entered into a five-year general agreement
with Lucent Technologies, Inc. ("Lucent") establishing terms and conditions for
the purchase of Lucent products, services, and licensed materials. This
agreement includes a three-year exclusivity commitment for the purchase of
products and services related to new switches. The agreement contains no minimum
purchase requirements.
8. FEDERAL INCOME TAXES:
The Company accounts for income tax under the provisions of Statement of
Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income
Taxes." SFAS 109 requires an asset and liability approach which requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events which have been recognized in the Company's financial
statements. The Company had approximately $3,023,215 and $460,747 of net
operating loss carryforwards for federal income tax purposes at March 31, 1998
and December 31, 1997, respectively. The net operating loss carryforwards will
expire in the
F-12
<PAGE> 130
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
years 2012 and 2013 if not previously utilized. The Company has recorded a
valuation allowance equal to the net deferred tax assets at March 31, 1998, and
December 31, 1997, due to the uncertainty of future operating results. The
valuation allowance will be reduced at such time as management believes it is
more likely than not that the net deferred tax assets will be realized. Any
reductions in the valuation allowance will reduce future provisions for income
tax expense.
The Company's deferred tax assets and the changes in those assets are:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 CHANGE 1998
------------ --------- -----------
<S> <C> <C> <C>
Start-up costs capitalized for tax
purposes................................... $ 1,025,958 $ (59,847) $ 966,111
Net operating loss carryforwards............. 156,561 871,332 1,027,893
Valuation allowance.......................... (1,182,519) (811,485) (1,994,004)
----------- --------- -----------
$ -- $ -- $ --
=========== ========= ===========
</TABLE>
Amortization of the original issue discount on the Notes as interest
expense is not deductible in the income tax return until paid.
Under existing income tax law, all operating expenses incurred prior to a
company commencing its principal operations are capitalized and amortized over a
five-year period for tax purposes.
9. STOCK OPTION PLAN:
The Company has a stock option plan (the "Plan") under which it grants
options to purchase Common Stock. The options granted have a term of six years
and vest over a three-year period. As of March 31, 1998, and December 31, 1997,
5,000 shares of Common Stock are reserved for issuance under the Plan.
The Company applies the provisions of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" and the related
interpretations in accounting for the Plan. Had compensation cost for the Plan
been determined based on the fair value of the options as of the grant dates for
awards under the Plan consistent with the method prescribed in Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123), the Company's net loss would have increased to the
pro forma amount indicated below. The Company estimated the fair value of each
option grant using the minimum value method permitted by SFAS No. 123 for
entities not publicly traded. The Company utilized the following assumptions in
the calculations for March 31, 1998, and December 31, 1997: weighted average
risk-free interest rates of 5.88% and 6.06%, respectively, expected life of six
years, and no dividends being paid over the life of the options.
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
---------- ------------
<S> <C> <C>
Net loss -- As reported.................................... $7,416,273 $3,478,000
Net loss -- Pro forma...................................... $7,430,895 $3,488,052
</TABLE>
F-13
<PAGE> 131
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of the Plan as of March 31, 1998, and December 31,
1997, is presented in the table below:
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997
-------------------------- --------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------- ---------------- ------- ----------------
<S> <C> <C> <C> <C>
Outstanding, beginning of year........ 419 $1,052.63 -- $ --
Granted............................... 305 1,052.63 419 1,052.63
Exercised............................. -- -- -- --
Forfeited............................. (130) 1,052.63 -- --
------- -------
Outstanding, end of year.............. 594 $1,052.63 419 $1,052.63
======= =======
Options exercisable at year-end....... -- --
======= =======
Weighted average fair value of options
granted............................. $314.13 $320.85
======= =======
</TABLE>
As of March 31, 1998, the 594 options outstanding under the Plan have an
exercise price of $1,052.63 and a weighted average remaining contractual life of
5.6 years. As of December 31, 1997, the 419 options outstanding have an exercise
price of $1,052.63 and a weighted average remaining contractual life of 5.8
years.
10. SUBSEQUENT EVENTS:
EQUIPMENT LEASE FINANCING
The Company and AT&T Capital Corporation ("AT&T Capital"), are in
discussions regarding up to $100.0 million of lease financing (the "Lease
Facility") for the acquisition of digital switches, software, electronics and
associated transmission equipment. The implementation of the Lease Facility and
the terms and conditions thereof remain subject to a number of conditions,
including the completion of the negotiation of such definitive terms and
conditions, completion of due diligence, and receipt of AT&T Capital internal
approval.
CAPITAL LEASE
The Company is currently negotiating a capital lease agreement for three,
four-fiber rings at an expected total cost of $3,485,000 for a term of ten years
with a renewal term of ten years.
PUBLIC STOCK AND NOTE OFFERINGS
The Company will seek to raise approximately $200 million of gross proceeds
in an initial public offering of Common Stock (the "Equity Offering") and an
additional $200 million of gross proceeds in an offering of Senior Discount
Notes due 2008 (the "Debt Offering").
The Fund Investors and Management Investors currently own 95.0% and 5.0%,
respectively, of the ownership interests of Allegiance LLC, an entity that owns
substantially all of the Company's outstanding capital stock. Upon consummation
of the Equity Offering, Allegiance LLC will dissolve and its assets (which
consist almost entirely of such capital stock) will be distributed to the Fund
Investors and the Management Investors in accordance with the LLC Agreement. The
LLC Agreement provides that the Equity Allocation between the Fund Investors and
the Management Investors will range between 95.0%/5.0% and 66.7%/33.3% based
upon the valuation of the Company's Common Stock implied by the Equity Offering.
Based upon the current valuation of the Company's Common Stock implied by the
Equity Offering, the Equity Allocation will be 66.7% to the Fund Investors and
33.3% to the Management Investors. Under generally accepted accounting
principles, at the date of the consummation of the Equity Offering, the Company
will be required to record the
F-14
<PAGE> 132
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
increase in the assets of Allegiance LLC allocated to the Management Investors
as an increase in additional paid-in capital and a non-cash, non-recurring
charge to operating expense (based upon the valuation of the Common Stock
implied by the Equity Offering). A portion of the charge will be recognized upon
the consummation of the Equity Offering and the remainder will be recognized
ratably in 1998, 1999, and 2000, assuming the Equity Offering is consummated in
1998.
In connection with the consummation of the Equity Offering, the outstanding
shares of Preferred Stock will be converted to Common Stock and the obligation
of Allegiance LLC to make additional capital contributions to the Company (and
the obligation of the members of Allegiance LLC to make capital contributions to
it) will terminate. Upon such conversion of the Preferred Stock, the obligation
of the Company to redeem the Preferred Stock also terminates and, therefore, the
Preferred Stock dividends accrued to the date of the Equity Offering will be
reversed as a credit to income and retained deficit.
F-15
<PAGE> 133
======================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFERS
CONTAINED HEREIN OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING
SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT
IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................ i
Prospectus Summary................... 1
Risk Factors......................... 11
Use of Proceeds...................... 26
Dividend Policy...................... 26
Capitalization....................... 27
Selected Financial Data.............. 28
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 30
Business............................. 36
Management........................... 55
Certain Relationships and Related
Transactions....................... 64
Security Ownership of Certain
Beneficial Owners and Management... 67
Description of Certain
Indebtedness....................... 68
The Exchange Offer................... 69
Description of the Notes............. 77
Description of the Warrants.......... 103
Description of Capital Stock......... 107
Certain United States Federal Tax
Considerations..................... 109
Plan of Distribution................. 113
Legal Matters........................ 113
Experts.............................. 113
Index to Consolidated Financial
Statements......................... F-1
</TABLE>
======================================================
======================================================
$445,000,000
ALLEGIANCE TELECOM, INC.
OFFER TO EXCHANGE ITS SERIES B 11 3/4%
SENIOR DISCOUNT NOTES DUE 2008 FOR ANY
AND ALL OF ITS OUTSTANDING 11 3/4% SENIOR
DISCOUNT NOTES DUE 2008
-----------------
PROSPECTUS
-----------------
, 1998
======================================================
<PAGE> 134
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
General Corporation Law
The Company is incorporated under the laws of the State of Delaware.
Section 145 ("Section 145") of the General Corporation Law of the State of
Delaware, as the same exists or may hereafter be amended (the "General
Corporation Law"), inter alia, provides that a Delaware corporation may
indemnify any persons who were, are or are threatened to be made, parties to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of such corporation), by reason of the fact that such person is or was an
officer, director, employee or agent of such corporation, or is or was serving
at the request of such corporation as a director, officer employee or agent of
another corporation or enterprise. The indemnity may include expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding, provided such person acted in good faith and in a manner he
reasonably believed to be in or not opposed to the corporation's best interests
and, with respect to any criminal action or proceeding, had no reasonable cause
to believe that his conduct was illegal. A Delaware corporation may indemnify
any persons who are, were or are threatened to be made, a party to any
threatened, pending or completed action or suit by or in the right of the
corporation by reasons of the fact that such person was a director, officer,
employee or agent of such corporation, or is or was serving at the request of
such corporation as a director, officer, employee or agent of another
corporation or enterprise. The indemnity may include expenses (including
attorneys' fees) actually and reasonably incurred by such person in connection
with the defense or settlement of such action or suit, provided such person
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the corporation's best interests, provided that no indemnification is
permitted without judicial approval if the officer, director, employee or agent
is adjudged to be liable to the corporation. Where an officer, director,
employee or agent is successful on the merits or otherwise in the defense of any
action referred to above, the corporation must indemnify him against the
expenses which such officer or director has actually and reasonably incurred.
Section 145 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation or enterprise,
against any liability asserted against him and incurred by him in any such
capacity, arising out of his status as such, whether or not the corporation
would otherwise have the power to indemnify him under Section 145.
Certificate of Incorporation
The Company's Certificate of Incorporation and By-laws provides for the
indemnification of officers and directors to the fullest extent permitted by the
General Corporation Law.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
3.1 Restated Certificate of Incorporation of Allegiance Telecom,
Inc.**
3.2 By-Laws of Allegiance Telecom, Inc.
4.1 Purchase Agreement, dated as of January 29, 1998 by and
among the Company and Morgan Stanley & Co. Incorporated,
Salomon Brothers Inc, Bear, Stearns & Co. Inc. and
Donaldson, Lufkin & Jenrette Securities Corporation.+
4.2 Indenture, dated as of February 3, 1998, by and among the
Company and The Bank of New York, as trustee.*
</TABLE>
II-1
<PAGE> 135
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
4.3 Form of 11 3/4% Senior Discount Notes.*
4.4 Registration Rights Agreement, dated as of February 3, 1998,
by and among the Company and Morgan Stanley & Co.
Incorporated, Salomon Brothers Inc, Bear, Stearns & Co. Inc.
and Donaldson, Lufkin & Jenrette Securities Corporation, as
Initial Purchasers.
5.1 Opinion of Kirkland & Ellis.
10.1 Stock Purchase Agreement, dated August 13, 1997, between
Allegiance LLC and the Company.*
10.2 Securityholders Agreement, dated August 13, 1997, among
Allegiance LLC, the Fund Investors, the Management Investors
and the Company.*
10.3 Registration Agreement, dated August 13, 1997, among the
Fund Investors, the Management Investors and the Company.*
10.4 Allegiance Telecom, Inc. 1997 Nonqualified Stock Option
Plan.*
10.5 Executive Purchase Agreement, dated August 13, 1997, among
Allegiance LLC, the Company and Royce J. Holland.
10.6 Executive Purchase Agreement, dated August 13, 1997, among
Allegiance LLC, the Company and Thomas M. Lord.*
10.7 Executive Purchase Agreement, dated January 28, 1998, among
Allegiance LLC, the Company and C. Daniel Yost.
10.8 Form of Executive Purchase Agreement among Allegiance LLC,
the Company and each of the other Management Investors.
10.9 Warrant Agreement, dated February 3, 1998, by and among the
Company and The Bank of New York, as Warrant Agent
(including the form of the Warrant Certificate).*
10.10 General Agreement dated October 16, 1997, as amended,
between the Company and Lucent Technologies Inc.
12.1 Statement Regarding Computation of Ratios of Earnings (Loss)
to Fixed Charges.
23.1 Consent of Arthur Andersen, LLP
23.2 Consent of Kirkland & Ellis (included in Exhibit 5.1).
24.1 Powers of Attorney (included in Part II to the Registration
Statement).*
25.1 Statement of Eligibility of Trustee on Form T-1.
27.1 Financial Data Schedule for the three months ended March 31,
1998.
27.2 Financial Data Schedule for the period from inception (April
22, 1997) through December 31, 1997.
99.1 Form of Letter of Transmittal.
99.2 Form of Notice of Guaranteed Delivery.
99.3 Form of Tender Instructions.
</TABLE>
- ---------------
* Previously filed
** To be filed by Amendment.
+ The Company agrees to furnish supplementally a copy of any omitted schedule
or exhibit to such exhibit to the Commission upon request.
II-2
<PAGE> 136
(b) FINANCIAL STATEMENT SCHEDULES.
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required
under the related instructions, are inapplicable or not material, or the
information called for thereby is otherwise included in the financial
statements and therefore has been omitted.
ITEM 22. UNDERTAKINGS.
The undersigned registrants hereby undertake:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at the time shall be deemed to
be the initial bonafide offering thereof;
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-3
<PAGE> 137
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Dallas,
State of Texas, on May 6, 1998.
ALLEGIANCE TELECOM, INC.
By: /s/ ROYCE J. HOLLAND
----------------------------------
Royce J. Holland
Chief Executive Officer
****
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement has been signed on May 6, 1998, by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
--------- --------
<C> <S>
/s/ ROYCE J. HOLLAND Chairman of the Board and Chief
- ----------------------------------------------------- Executive Officer (Principal
Royce J. Holland Executive Officer)
* President, Chief Operating
- ----------------------------------------------------- Officer and Director
C. Daniel Yost
* Executive Vice President, Chief
- ----------------------------------------------------- Financial Officer, and
Thomas M. Lord Director (Principal Financial
Officer)
/s/ DENNIS M. MAUNDER Vice President and Controller
- ----------------------------------------------------- (Principal Accounting Officer)
Dennis M. Maunder
* Senior Vice President of Sales
- ----------------------------------------------------- and Marketing and Director
John J. Callahan
* Director
- -----------------------------------------------------
Paul D. Carbery
* Director
- -----------------------------------------------------
James E. Crawford, III
* Director
- -----------------------------------------------------
John B. Ehrenkranz
* Director
- -----------------------------------------------------
Paul J. Finnegan
* Director
- -----------------------------------------------------
Richard D. Frisbie
</TABLE>
II-4
<PAGE> 138
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
--------- --------
<C> <S>
Director
- -----------------------------------------------------
Reed E. Hundt
* Director
- -----------------------------------------------------
Robert H. Niehaus
* Director
- -----------------------------------------------------
James N. Perry, Jr.
</TABLE>
- ---------------
* The undersigned, by signing his name hereto, does sign and execute this
Amendment No. 1 to Registration Statement on behalf of the above named
officers and directors of Allegiance Telecom, Inc. pursuant to the Power of
Attorney executed by such officers and directors and filed with the Securities
and Exchange Commission.
<TABLE>
<C> <S>
/s/ DENNIS M. MAUNDER Attorney-in-Fact
- -----------------------------------------------------
Dennis M. Maunder
</TABLE>
II-5
<PAGE> 139
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
3.1 Certificate of Incorporation of Allegiance Telecom, Inc.**
3.2 By-Laws of Allegiance Telecom, Inc.
4.1 Purchase Agreement, dated as of January 29, 1998 by and
among the Company and Morgan Stanley & Co. Incorporated,
Salomon Brothers Inc, Bear, Stearns & Co. Inc. and
Donaldson, Lufkin & Jenrette Securities Corporation.+
4.2 Indenture, dated as of February 3, 1998, by and among the
Company and The Bank of New York, as trustee.*
4.3 Form of 11 3/4% Senior Discount Notes.*
4.4 Registration Rights Agreement, dated as of February 3, 1998,
by and among the Company and Morgan Stanley & Co.
Incorporated, Salomon Brothers Inc, Bear, Stearns & Co. Inc.
and Donaldson, Lufkin & Jenrette Securities Corporation, as
Initial Purchasers.
5.1 Opinion of Kirkland & Ellis.
10.1 Stock Purchase Agreement, dated August 13, 1997, between
Allegiance LLC and the Company.*
10.2 Securityholders Agreement, dated August 13, 1997, among
Allegiance LLC, the Fund Investors, the Management Investors
and the Company.*
10.3 Registration Agreement, dated August 13, 1997, among the
Fund Investors, the Management Investors and the Company.*
10.4 Allegiance Telecom, Inc. 1997 Nonqualified Stock Option
Plan.*
10.5 Executive Purchase Agreement, dated August 13, 1997, among
Allegiance LLC, the Company and Royce J. Holland.
10.6 Executive Purchase Agreement, dated August 13, 1997, among
Allegiance LLC, the Company and Thomas M. Lord.*
10.7 Executive Purchase Agreement, dated January 28, 1998, among
Allegiance LLC, the Company and C. Daniel Yost.
10.8 Form of Executive Purchase Agreement among Allegiance LLC,
the Company and each of the other Management Investors.
10.9 Warrant Agreement, dated February 3, 1998, by and among the
Company and The Bank of New York, as Warrant Agent
(including the form of the Warrant Certificate).*
10.10 General Agreement, dated October 16, 1997, as amended,
between the Company and Lucent Technologies Inc.
12.1 Statement Regarding Computation of Ratios of Earnings (Loss)
to Fixed Charges.
23.1 Consent of Arthur Andersen, LLP
23.2 Consent of Kirkland & Ellis (included in Exhibit 5.1).
24.1 Powers of Attorney (included in Part II to the Registration
Statement).*
25.1 Statement of Eligibility of Trustee on Form T-1.
27.1 Financial Data Schedule for the three months ended March 31,
1998.
27.2 Financial Data Schedule for the period from inception (April
22, 1997) through December 31, 1997.
99.1 Form of Letter of Transmittal.
99.2 Form of Notice of Guaranteed Delivery.
99.3 Form of Tender Instructions.
</TABLE>
- ---------------
* Previously filed
** To be filed by Amendment.
+ The Company agrees to furnish supplementally a copy of any omitted schedule
or exhibit to such exhibit to the Commission upon request.
<PAGE> 1
EXHIBIT 3.2
BY-LAWS
OF
ALLEGIANCE TELECOM, INC.
A Delaware Corporation
ARTICLE I
OFFICES
Section 1. Registered Office. The registered office of the Corporation
in the State of Delaware shall be located at 1013 Centre Road, in the City of
Wilmington, Delaware, County of New Castle. The name of the Corporation's
registered agent at such address shall be Corporation Service Company. The
registered office and/or registered agent of the Corporation may be changed from
time to time by action of the board of directors.
Section 2. Other Offices. The Corporation may also have offices at such
other places, both within and without the State of Delaware, as the board of
directors may from time to time determine or the business of the Corporation may
require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Place and Time of Meetings. An annual meeting of the
stockholders shall be held each year within one hundred eighty (180) days after
the close of the immediately preceding fiscal year of the Corporation for the
purpose of electing directors and conducting such other proper business as may
come before the meeting. The date, time and place of the annual meeting shall be
determined by the Chief Executive Officer of the Corporation; provided, that if
the Chief Executive Officer does not act, the board of directors shall determine
the date, time and place of such meeting.
Section 2. Special Meetings. Special meetings of stockholders may be
called for any purpose and may be held at such time and place, within or without
the State of Delaware, as shall be stated in a notice of meeting or in a duly
executed waiver of notice thereof. Such meetings may be called at any time by
the board of directors or the Chief Executive Officer and shall be called by the
Chief Executive Officer upon the written request of holders of shares entitled
to cast not less than fifty percent of the votes at the meeting. Such written
request shall state the purpose or purposes of the meeting and shall be
delivered to the Chief Executive Officer. On such written request, the Chief
Executive Officer shall fix a date and time for such meeting within two days of
the date requested for such meeting in such written request.
<PAGE> 2
Section 3. Place of Meetings. The board of directors may designate any
place, either within or without the State of Delaware, as the place of meeting
for any annual meeting or for any special meeting called by the board of
directors. If no designation is made, or if a special meeting be otherwise
called, the place of meeting shall be the principal executive office of the
Corporation.
Section 4. Notice. Whenever stockholders are required or permitted to
take action at a meeting, written or printed notice stating the place, date,
time, and, in the case of special meetings, the purpose or purposes, of such
meeting, shall be given to each stockholder entitled to vote at such meeting not
less than ten (10) nor more than sixty (60) days before the date of the meeting.
All such notices shall be delivered, either personally or by mail, by or at the
direction of the board of directors, the Chief Executive Officer, the President
and Chief Operating Officer or the Secretary, and if mailed, such notice shall
be deemed to be delivered when deposited in the United States mail, postage
prepaid, addressed to the stockholder at his, her or its address as the same
appears on the records of the Corporation. Attendance of a person at a meeting
shall constitute a waiver of notice of such meeting, except when the person
attends for the express purpose of objecting at the beginning of the meeting to
the transaction of any business because the meeting is not lawfully called or
convened.
Section 5. Stockholders List. The officer having charge of the stock
ledger of the Corporation shall make, at least ten (10) days before every
meeting of the stockholders, a complete list of the stockholders entitled to
vote at such meeting arranged in alphabetical order, showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten (10) days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present.
Section 6. Quorum. The holders of a majority of the outstanding shares
of capital stock, present in person or represented by proxy, shall constitute a
quorum at all meetings of the stockholders, except as otherwise provided by
statute or by the certificate of incorporation. If a quorum is not present, the
holders of a majority of the shares present in person or represented by proxy at
the meeting, and entitled to vote at the meeting, may adjourn the meeting to
another time and/or place. When a quorum is once present to commence a meeting
of stockholders, it is not broken by the subsequent withdrawal of any
stockholders or their proxies. When a quorum is once present to commence a
meeting of stockholders, it is not broken by the subsequent withdrawal of any
stockholder or their proxies.
Section 7. Adjourned Meetings. When a meeting is adjourned to another
time and place, notice need not be given of the adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting the Corporation may transact any business which
might have been transacted at the original meeting. If the adjournment is for
more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
- 2 -
<PAGE> 3
Section 8. Vote Required. When a quorum is present, the affirmative
vote of the majority of shares present in person or represented by proxy at the
meeting and entitled to vote on the subject matter shall be the act of the
stockholders, unless the question is one upon which by express provisions of an
applicable law or of the certificate of incorporation a different vote is
required, in which case such express provision shall govern and control the
decision of such question.
Section 9. Voting Rights. Except as otherwise provided by the General
Corporation Law of the State of Delaware or by the certificate of incorporation
of the Corporation or any amendments thereto and subject to Section 3 of Article
VI hereof, every stockholder shall at every meeting of the stockholders be
entitled to one vote in person or by proxy for each share of common stock held
by such stockholder.
Section 10. Proxies. Each stockholder entitled to vote at a meeting of
stockholders or to express consent or dissent to corporate action in writing
without a meeting may authorize another person or persons to act for him or her
by proxy, but no such proxy shall be voted or acted upon after three (3) years
from its date, unless the proxy provides for a longer period. At each meeting of
the stockholders, and before any voting commences, all proxies filed at or
before the meeting shall be submitted to and examined by the Secretary or a
person designated by the Secretary, and no shares may be represented or voted
under a proxy that has been found to be invalid or irregular. A duly executed
proxy shall be irrevocable if it states that it is irrevocable and if, and only
as long as, it is coupled with an interest sufficient in law to support an
irrevocable power. A proxy may be made irrevocable regardless of whether the
interest with which it is coupled is an interest in the stock itself or an
interest in the Corporation generally. Any proxy is suspended when the person
executing the proxy is present at a meeting of stockholders and elects to vote,
except that when such proxy is coupled with an interest and the fact of the
interest appears on the face of the proxy, the agent named in the proxy shall
have all voting and other rights referred to in the proxy, notwithstanding the
presence of the person executing the proxy.
Section 11. Action by Written Consent. Unless otherwise provided in the
certificate of incorporation, any action required to be taken at any annual or
special meeting of stockholders of the Corporation or any action which may be
taken at any annual or special meeting of such stockholders, may be taken
without a meeting, without prior notice and without a vote, if a consent or
consents in writing, setting forth the action so taken and bearing the dates of
signature of the stockholders who signed the consent or consents, shall be
signed by the holders of outstanding stock having not less than the minimum
number of votes that would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote thereon were present and voted and
shall be delivered to the Corporation by delivery to its registered office in
the state of Delaware, or the Corporation's principal place of business, or an
officer or agent of the Corporation having custody of the book or books in which
proceedings of meetings of the stockholders are recorded. Delivery made to the
Corporation's registered office shall be by hand or by certified or registered
mail, return receipt requested. All consents properly delivered in accordance
with this section shall be deemed to be recorded when so delivered. No written
consent shall be effective to take the corporate action referred to therein
unless, within sixty (60) days of the earliest dated consent delivered to the
Corporation as required by this section, written consents signed by the holders
of a sufficient number of shares to take such corporate action are so recorded.
Prompt notice of the taking of the corporate action without a meeting by less
than unanimous written consent shall be given to those stockholders who have not
consented in writing. Any action taken pursuant to such written consent or
consents of the stockholders shall have the same force and effect as if taken by
the stockholders at a meeting thereof.
- 3 -
<PAGE> 4
ARTICLE III
DIRECTORS
The provisions of this Article III are subject to certain voting
agreements and provisions relating to the composition and powers and the
election, term, resignation, and removal of members of the board of directors
and committees thereof, set forth in that certain Stock Purchase Agreement,
dated on or about August 12, 1997 (as amended from time to time in accordance
with its terms), by and between the Corporation and Transcend Telecom, L.L.C., a
Delaware limited liability company and the Corporation's initial sole
shareholder (the "LLC"), and that certain Securityholders Agreement, dated on or
about August 12, 1997 (as amended from time to time in accordance with its
terms), by and between the Corporation, the LLC, and the holders of interests in
the profits, losses and distributions of the LLC.
Section 1. General Powers. The business and affairs of the Corporation
shall be managed by or under the direction of the board of directors.
Section 2. Number, Election and Term of Office. The number of directors
which shall constitute the first board shall be thirteen (13). Thereafter, the
number of directors shall be established from time to time by resolution of the
stockholders. The directors shall be elected by a plurality of the votes of the
shares present in person or represented by proxy at the meeting and entitled to
vote in the election of directors. The directors shall be elected in this manner
at the annual meeting of the stockholders, except as provided in Section 4 of
this Article III. Each director elected shall hold office until a successor is
duly elected and qualified or until his or her earlier death, resignation or
removal as hereinafter provided.
Section 3. Removal and Resignation. Any director or the entire board of
directors may be removed at any time, with or without cause, by the holders of a
majority of the shares then entitled to vote at an election of directors.
Whenever the holders of any class or series are entitled to elect one or more
directors by the provisions of the Corporation's certificate of incorporation,
the provisions of this section shall apply, in respect to the removal without
cause of a director or directors so elected, to the vote of the holders of the
outstanding shares of that class or series and not to the vote of the
outstanding shares as a whole.
Section 4. Vacancies. Vacancies and newly created directorships
resulting from any increase in the authorized number of directors may be filled
by a majority of the shares then entitled to vote at an election of directors.
Each director so chosen shall hold office until a successor is duly elected and
qualified or until his or her earlier death, resignation or removal as herein
provided.
- 4 -
<PAGE> 5
Section 5. Annual Meetings. The annual meeting of each newly elected
board of directors shall be held without other notice than this by-law
immediately after, and at the same place as, the annual meeting of stockholders.
Section 6. Other Meetings and Notice. Regular meetings, other than the
annual meeting, of the board of directors may be held without notice at such
time and at such place as shall from time to time be determined by resolution of
the board. Special meetings of the board of directors may be called by or at the
request of the Chief Executive Officer on at least twenty-four (24) hours notice
to each director, either personally, by telephone, by mail, or by telegraph; in
like manner and on like notice the Chief Executive Officer must call a special
meeting on the written request of at least one of the directors.
Section 7. Quorum, Required Vote and Adjournment. A majority of the
total number of directors shall constitute a quorum for the transaction of
business. The vote of a majority of directors present at a meeting at which a
quorum is present shall be the act of the board of directors. If a quorum shall
not be present at any meeting of the board of directors, the directors present
thereat may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present.
Section 8. Committees. The board of directors may, by resolution passed
by a majority of the whole board, designate one or more committees, each
committee to consist of one or more of the directors of the Corporation, which
to the extent provided in such resolution or these By-laws shall have and may
exercise the powers of the board of directors in the management and affairs of
the Corporation except as otherwise limited by law. The board of directors may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee. Such
committee or committees shall have such name or names as may be determined from
time to time by resolution adopted by the board of directors. Each committee
shall keep regular minutes of its meetings and report the same to the board of
directors when required.
Section 9. Committee Rules. Each committee of the board of directors
may fix its own rules of procedure and shall hold its meetings as provided by
such rules, except as may otherwise be provided by a resolution of the board of
directors designating such committee. In the event that a member and that
member's alternate, if alternates are designated by the board of directors as
provided in Section 8 of this Article III, of such committee is or are absent or
disqualified, the member or members thereof present at any meeting and not
disqualified from voting, whether or not such member or members constitute a
quorum, may unanimously appoint another member of the board of directors to act
at the meeting in place of any such absent or disqualified member.
Section 10. Communications Equipment. Members of the board of directors
or any committee thereof may participate in and act at any meeting of such board
or committee through the use of a conference telephone or other communications
equipment by means of which all persons participating in the meeting can hear
each other, and participation in the meeting pursuant to this section shall
constitute presence in person at the meeting.
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Section 11. Waiver of Notice and Presumption of Assent. Any member of
the board of directors or any committee thereof who is present at a meeting
shall be conclusively presumed to have waived notice of such meeting except when
such member attends for the express purpose of objecting at the beginning of the
meeting to the transaction of any business because the meeting is not lawfully
called or convened. Such member shall be conclusively presumed to have assented
to any action taken unless his or her dissent shall be entered in the minutes of
the meeting or unless his or her written dissent to such action shall be filed
with the person acting as the secretary of the meeting before the adjournment
thereof or shall be forwarded by registered mail to the Secretary of the
Corporation immediately after the adjournment of the meeting. Such right to
dissent shall not apply to any member who voted in favor of such action.
Section 12. Action by Written Consent. Unless otherwise restricted by
the certificate of incorporation, any action required or permitted to be taken
at any meeting of the board of directors, or of any committee thereof, may be
taken without a meeting if all members of the board or committee, as the case
may be, consent thereto in writing, and the writing or writings are filed with
the minutes of proceedings of the board or committee.
ARTICLE IV
OFFICERS
Section 1. Number. The officers of the Corporation shall be elected by
the board of directors and shall consist of a Chief Executive Officer, a
President and Chief Operating Officer, a Chief Financial Officer, one or more
Vice-Presidents, a Treasurer, a Secretary, and such other officers and assistant
officers as may be deemed necessary or desirable by the board of directors. Any
number of offices may be held by the same person. In its discretion, the board
of directors may choose not to fill any office for any period as it may deem
advisable, except that the offices of Chief Executive Officer and President and
Chief Operating Officer shall be filled as expeditiously as possible.
Section 2. Election and Term of Office. The officers of the Corporation
shall be elected annually by the board of directors at its first meeting held
after each annual meeting of stockholders or as soon thereafter as conveniently
may be. Vacancies may be filled or new offices created and filled at any meeting
of the board of directors. Each officer shall hold office until a successor is
duly elected and qualified or until his or her earlier death, resignation or
removal as hereinafter provided.
Section 3. Removal. Any officer or agent elected by the board of
directors may be removed by the board of directors whenever in its judgment the
best interests of the Corporation would be served thereby, but such removal
shall be without prejudice to the contract rights, if any, of the person so
removed.
Section 4. Vacancies. Any vacancy occurring in any office because of
death, resignation, removal, disqualification or otherwise, may be filled by the
board of directors for the unexpired portion of the term by the board of
directors then in office.
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Section 5. Compensation. Compensation of all officers shall be fixed by
the board of directors, and no officer shall be prevented from receiving such
compensation by virtue of his or her also being a director of the corporation.
Section 6. Chief Executive Officer. The Chief Executive Officer shall,
subject to the powers of the board of directors, be in the general and active
charge of the entire business and affairs of the corporation, and shall be its
chief policy making officer. He or she shall preside at all meetings of the
board of directors and stockholders and shall have such other powers and perform
such other duties as may be prescribed by the board of directors or provided in
these By-laws. Whenever the President and Chief Operating Officer is unable to
serve, by reason of sickness, absence or otherwise, the Chief Executive Officer
shall perform all the duties and responsibilities and exercise all the powers of
the President and Chief Operating Officer.
Section 7. President and Chief Operating Officer. The President and
Chief Operating Officer of the Corporation, subject to the powers of the board
of directors and the Chief Executive Officer, shall have general charge of the
business affairs and property of the Corporation, and control over its officers,
agents and employees, and shall see that all orders and resolutions of the board
of directors are carried into effect. The President and Chief Operating Officer
shall execute bonds, mortgages and other contracts requiring a seal, under the
seal of the Corporation, except where required or permitted by law to be
otherwise signed and executed or except where the signing and execution thereof
shall be expressly delegated by the board of directors to some other officer or
agent of the Corporation. The President and Chief Operating Officer shall have
such other powers and perform such other duties as may be prescribed by the
Chief Executive Officer, the board of directors or as may be provided in these
By-laws.
Section 8. Chief Financial Officer. The Chief Financial Officer of
the Corporation shall, under the direction of the Chief Executive Officer, be
responsible for all financial and accounting matters of the Corporation. The
Chief Financial Officer shall have such other powers and perform such other
duties as may be prescribed by the Chief Executive Officer or the board of
directors or as may be provided in these By-laws.
Section 9. Vice-Presidents. The Vice-President, or if there shall be
more than one, the Vice- Presidents in the order determined by the board of
directors, shall, in the absence or disability of the President, act with all of
the powers and be subject to all the restrictions of the President and Chief
Operating Officer. The Vice-Presidents shall also perform such other duties and
have such other powers as the board of directors, the Chief Executive Officer or
these By-laws may, from time to time, prescribe.
Section 10. The Secretary and Assistant Secretaries. The Secretary
shall attend all meetings of the board of directors, all meetings of the
committees thereof and all meetings of the stockholders and record all the
proceedings of the meetings in a book or books to be kept for that purpose.
Under the Chief Executive Officer's supervision, the Secretary shall give, or
cause to be given, all notices required to be given by these By-laws or by law;
shall have such powers and perform such duties as the board of directors, the
Chief Executive Officer or these By-laws may, from time to time, prescribe; and
shall have custody of the corporate seal of the Corporation. The Secretary, or
an Assistant Secretary, shall have authority to affix the corporate seal to any
instrument requiring it and
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when so affixed, it may be attested by his or her signature or by the signature
of such Assistant Secretary. The board of directors may give general authority
to any other officer to affix the seal of the Corporation and to attest the
affixing by his or her signature. The Assistant Secretary, or if there be more
than one, the Assistant Secretaries in the order determined by the board of
directors, shall, in the absence or disability of the Secretary, perform the
duties and exercise the powers of the Secretary and shall perform such other
duties and have such other powers as the board of directors, the Chief Executive
Officer or the Secretary may, from time to time, prescribe.
Section 11. The Treasurer and Assistant Treasurer. The Treasurer shall
have the custody of the corporate funds and securities; shall keep full and
accurate accounts of receipts and disbursements in books belonging to the
Corporation; shall deposit all monies and other valuable effects in the name and
to the credit of the Corporation as may be ordered by the board of directors;
shall cause the funds of the Corporation to be disbursed when such disbursements
have been duly authorized, taking proper vouchers for such disbursements; and
shall render to the Chief Executive Officer and the board of directors, at its
regular meeting or when the board of directors so requires, an account of the
Corporation; shall have such powers and perform such duties as the board of
directors, the Chief Executive Officer or these By-laws may, from time to time,
prescribe. If required by the board of directors, the Treasurer shall give the
Corporation a bond (which shall be rendered every six (6) years) in such sums
and with such surety or sureties as shall be satisfactory to the board of
directors for the faithful performance of the duties of the office of Treasurer
and for the restoration to the Corporation, in case of death, resignation,
retirement, or removal from office, of all books, papers, vouchers, money, and
other property of whatever kind in the possession or under the control of the
Treasurer belonging to the Corporation. The Assistant Treasurer, or if there
shall be more than one, the Assistant Treasurers in the order determined by the
board of directors, shall in the absence or disability of the Treasurer, perform
the duties and exercise the powers of the Treasurer. The Assistant Treasurers
shall perform such other duties and have such other powers as the board of
directors, the and Chief Executive Officer or Treasurer may, from time to time,
prescribe.
Section 12. Other Officers, Assistant Officers and Agents. Officers,
assistant officers and agents, if any, other than those whose duties are
provided for in these By-laws, shall have such authority and perform such duties
as may from time to time be prescribed by resolution of the board of directors.
Section 13. Absence or Disability of Officers. In the case of the
absence or disability of any officer of the Corporation and of any person hereby
authorized to act in such officer's place during such officer's absence or
disability, the board of directors may by resolution delegate the powers and
duties of such officer to any other officer or to any director, or to any other
person whom it may select.
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ARTICLE V
INDEMNIFICATION OF OFFICERS, DIRECTORS AND OTHERS
Section 1. Nature of Indemnity. Each person who was or is made a party
or is threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she, or a person
of whom he or she is the legal representative, is or was a director or officer,
of the Corporation or is or was serving at the request of the Corporation as a
director, officer, employee, fiduciary, or agent of another Corporation or of a
partnership, joint venture, trust or other enterprise, shall be indemnified and
held harmless by the Corporation to the fullest extent which it is empowered to
do so unless prohibited from doing so by the General Corporation Law of the
State of Delaware, as the same exists or may hereafter be amended (but, in the
case of any such amendment, only to the extent that such amendment permits the
Corporation to provide broader indemnification rights than said law permitted
the Corporation to provide prior to such amendment) against all expense,
liability and loss (including attorneys' fees actually and reasonably incurred
by such person in connection with such proceeding) and such indemnification
shall inure to the benefit of his or her heirs, executors and administrators;
provided, however, that, except as provided in Section 2 hereof, the Corporation
shall indemnify any such person seeking indemnification in connection with a
proceeding initiated by such person only if such proceeding was authorized by
the board of directors of the Corporation. The right to indemnification
conferred in this Article V shall be a contract right and, subject to Sections 2
and 5 hereof, shall include the right to be paid by the Corporation the expenses
incurred in defending any such proceeding in advance of its final disposition.
The Corporation may, by action of its board of directors, provide
indemnification to employees and agents of the Corporation with the same scope
and effect as the foregoing indemnification of directors and officers.
Section 2. Procedure for Indemnification of Directors and Officers. Any
indemnification of a director or officer of the Corporation under Section 1 of
this Article V or advance of expenses under Section 5 of this Article V shall be
made promptly, and in any event within thirty (30) days, upon the written
request of the director or officer. If a determination by the Corporation that
the director or officer is entitled to indemnification pursuant to this Article
V is required, and the Corporation fails to respond within sixty (60) days to a
written request for indemnity, the Corporation shall be deemed to have approved
the request. If the Corporation denies a written request for indemnification or
advancing of expenses, in whole or in part, or if payment in full pursuant to
such request is not made within thirty (30) days, the right to indemnification
or advances as granted by this Article V shall be enforceable by the director or
officer in any court of competent jurisdiction. Such person's costs and expenses
incurred in connection with successfully establishing his or her right to
indemnification, in whole or in part, in any such action shall also be
indemnified by the Corporation. It shall be a defense to any such action (other
than an action brought to enforce a claim for expenses incurred in defending any
proceeding in advance of its final disposition where the required undertaking,
if any, has been tendered to the Corporation) that the claimant has not met the
standards of conduct which make it permissible under the General Corporation Law
of the State of Delaware for the Corporation to indemnify the claimant for the
amount claimed, but the burden of such defense shall be on the Corporation.
Neither the failure of the Corporation (including its board of directors,
independent legal counsel, or its stockholders) to have made a determination
prior
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to the commencement of such action that indemnification of the claimant is
proper in the circumstances because he or she has met the applicable standard of
conduct set forth in the General Corporation Law of the State of Delaware, nor
an actual determination by the Corporation (including its board of directors,
independent legal counsel, or its stockholders) that the claimant has not met
such applicable standard of conduct, shall be a defense to the action or create
a presumption that the claimant has not met the applicable standard of conduct.
Section 3. Article Not Exclusive. The rights to indemnification and the
payment of expenses incurred in defending a proceeding in advance of its final
disposition conferred in this Article V shall not be exclusive of any other
right which any person may have or hereafter acquire under any statute,
provision of the certificate of incorporation, by-law, agreement, vote of
stockholders or disinterested directors or otherwise.
Section 4. Insurance. The Corporation may purchase and maintain
insurance on its own behalf and on behalf of any person who is or was a
director, officer, employee, fiduciary, or agent of the Corporation or was
serving at the request of the Corporation as a director, officer, employee or
agent of another Corporation, partnership, joint venture, trust or other
enterprise against any liability asserted against him or her and incurred by him
or her in any such capacity, whether or not the Corporation would have the power
to indemnify such person against such liability under this Article V.
Section 5. Expenses. Expenses incurred by any person described in
Section 1 of this Article V in defending a proceeding shall be paid by the
Corporation in advance of such proceed ing's final disposition unless otherwise
determined by the board of directors in the specific case upon receipt of an
undertaking by or on behalf of the director or officer to repay such amount if
it shall ultimately be determined that he or she is not entitled to be
indemnified by the Corporation. Such expenses incurred by other employees and
agents may be so paid upon such terms and conditions, if any, as the board of
directors deems appropriate.
Section 6. Employees and Agents. Persons who are not covered by the
foregoing provisions of this Article V and who are or were employees or agents
of the Corporation, or who are or were serving at the request of the Corporation
as employees or agents of another Corporation, partnership, joint venture, trust
or other enterprise, may be indemnified to the extent authorized at any time or
from time to time by the board of directors.
Section 7. Contract Rights. The provisions of this Article V shall be
deemed to be a contract right between the Corporation and each director or
officer who serves in any such capacity at any time while this Article V and the
relevant provisions of the General Corporation Law of the State of Delaware or
other applicable law are in effect, and any repeal or modification of this
Article V or any such law shall not affect any rights or obligations then
existing with respect to any state of facts or proceeding then existing.
Section 8. Merger or Consolidation. For purposes of this Article V,
references to "the Corporation" shall include, in addition to the resulting
Corporation, any constituent Corporation (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors,
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officers, and employees or agents, so that any person who is or was a director,
officer, employee or agent of such constituent Corporation, or is or was serving
at the request of such constituent Corporation as a director, officer, employee
or agent of another Corporation, partnership, joint venture, trust or other
enterprise, shall stand in the same position under this Article V with respect
to the resulting or surviving Corporation as he or she would have with respect
to such constituent Corporation if its separate existence had continued.
ARTICLE VI
CERTIFICATES OF STOCK
Section 1. Form. Every holder of stock in the Corporation shall be
entitled to have a certificate, signed by, or in the name of the Corporation by
the Chief Executive Officer, the President and Chief Operating Officer, the
Chief Financial Officer or a Vice-President and the Secretary or an Assistant
Secretary of the Corporation, certifying the number of shares owned by such
holder in the Corporation. If such a certificate is countersigned (1) by a
transfer agent or an assistant transfer agent other than the Corporation or its
employee or (2) by a registrar, other than the Corporation or its employee, the
signature of any such Chief Executive Officer, President and Chief Operating
Officer, Chief Financial Officer, Vice-President, Secretary, or Assistant
Secretary may be facsimiles. In case any officer or officers who have signed, or
whose facsimile signature or signatures have been used on, any such certificate
or certificates shall cease to be such officer or officers of the Corporation
whether because of death, resignation or otherwise before such certificate or
certificates have been delivered by the Corporation, such certificate or
certificates may neverthe less be issued and delivered as though the person or
persons who signed such certificate or certificates or whose facsimile signature
or signatures have been used thereon had not ceased to be such officer or
officers of the Corporation. All certificates for shares shall be consecutively
numbered or otherwise identified. The name of the person to whom the shares
represented thereby are issued, with the number of shares and date of issue,
shall be entered on the books of the Corporation. Shares of stock of the
Corporation shall only be transferred on the books of the Corporation by the
holder of record thereof or by such holder's attorney duly authorized in
writing, upon surrender to the Corporation of the certificate or certificates
for such shares endorsed by the appropriate person or persons, with such
evidence of the authenticity of such endorsement, transfer, authorization, and
other matters as the Corporation may reasonably require, and accompanied by all
necessary stock transfer stamps. In that event, it shall be the duty of the
Corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate or certificates, and record the transaction on its books.
The board of directors may appoint a bank or trust company organized under the
laws of the United States or any state thereof to act as its transfer agent or
registrar, or both in connection with the transfer of any class or series of
securities of the Corporation.
Section 2. Lost Certificates. The board of directors may direct a new
certificate or certificates to be issued in place of any certificate or
certificates previously issued by the Corporation alleged to have been lost,
stolen, or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost, stolen, or destroyed. When
authorizing such issue of a new certificate or certificates, the board of
directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen, or destroyed certificate or
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certificates, or his or her legal representative, to give the Corporation a bond
sufficient to indemnify the Corporation against any claim that may be made
against the Corporation on account of the loss, theft or destruction of any such
certificate or the issuance of such new certificate.
Section 3. Fixing a Record Date for Stockholder Meetings. In order that
the Corporation may determine the stockholders entitled to notice of or to vote
at any meeting of stockholders or any adjournment thereof, the board of
directors may fix a record date, which record date shall not precede the date
upon which the resolution fixing the record date is adopted by the board of
directors, and which record date shall not be more than sixty (60) nor less than
ten (10) days before the date of such meeting. If no record date is fixed by the
board of directors, the record date for determining stockholders entitled to
notice of or to vote at a meeting of stockholders shall be the close of business
on the next day preceding the day on which notice is given, or if notice is
waived, at the close of business on the day next preceding the day on which the
meeting is held. A determination of stockholders of record entitled to notice of
or to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the board of directors may fix a new record
date for the adjourned meeting.
Section 4. Fixing a Record Date for Action by Written Consent. In order
that the Corporation may determine the stockholders entitled to consent to
corporate action in writing without a meeting, the board of directors may fix a
record date, which record date shall not precede the date upon which the
resolution fixing the record date is adopted by the board of directors, and
which date shall not be more than ten (10) days after the date upon which the
resolution fixing the record date is adopted by the board of directors. If no
record date has been fixed by the board of directors, the record date for
determining stockholders entitled to consent to corporate action in writing
without a meeting, when no prior action by the board of directors is required by
statute, shall be the first date on which a signed written consent setting forth
the action taken or proposed to be taken is delivered to the Corporation by
delivery to its registered office in the State of Delaware, its principal place
of business, or an officer or agent of the Corporation having custody of the
book in which proceedings of meetings of stockholders are recorded. Delivery
made to the Corporation's registered office shall be by hand or by certified or
registered mail, return receipt requested. If no record date has been fixed by
the board of directors and prior action by the board of directors is required by
statute, the record date for determining stockholders entitled to consent to
corporate action in writing without a meeting shall be at the close of business
on the day on which the board of directors adopts the resolution taking such
prior action.
Section 5. Fixing a Record Date for Other Purposes. In order that the
Corporation may determine the stockholders entitled to receive payment of any
dividend or other distribution or allotment or any rights or the stockholders
entitled to exercise any rights in respect of any change, conversion or exchange
of stock, or for the purposes of any other lawful action, the board of directors
may fix a record date, which record date shall not precede the date upon which
the resolution fixing the record date is adopted, and which record date shall be
not more than sixty (60) days prior to such action. If no record date is fixed,
the record date for determining stockholders for any such purpose shall be at
the close of business on the day on which the board of directors adopts the
resolution relating thereto.
Section 6. Registered Stockholders. Prior to the surrender to the
Corporation of the certificate or certificates for a share or shares of stock
with a request to record the transfer of such
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share or shares, the Corporation may treat the registered owner as the person
entitled to receive dividends, to vote, to receive notifications, and otherwise
to exercise all the rights and powers of an owner. The Corporation shall not be
bound to recognize any equitable or other claim to or interest in such share or
shares on the part of any other person, whether or not it shall have express or
other notice thereof.
Section 7. Subscriptions for Stock. Unless otherwise provided for in
the subscription agreement, subscriptions for shares shall be paid in full at
such time, or in such installments and at such times, as shall be determined by
the board of directors. Any call made by the board of directors for payment on
subscriptions shall be uniform as to all shares of the same class or as to all
shares of the same series. In case of default in the payment of any installment
or call when such payment is due, the Corporation may proceed to collect the
amount due in the same manner as any debt due the Corporation.
ARTICLE VII
GENERAL PROVISIONS
Section 1. Dividends. Dividends upon the capital stock of the
Corporation, subject to the provisions of the certificate of incorporation, if
any, may be declared by the board of directors at any regular or special
meeting, pursuant to law. Dividends may be paid in cash, in property, or in
shares of the capital stock, subject to the provisions of the certificate of
incorporation. Before payment of any dividend, there may be set aside out of any
funds of the Corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or main taining any property of the Corporation, or any other purpose
and the directors may modify or abolish any such reserve in the manner in which
it was created.
Section 2. Checks, Drafts or Orders. All checks, drafts, or other
orders for the payment of money by or to the Corporation and all notes and other
evidences of indebtedness issued in the name of the Corporation shall be signed
by such officer or officers, agent or agents of the Corporation, and in such
manner, as shall be determined by resolution of the board of directors or a duly
authorized committee thereof.
Section 3. Contracts. The board of directors may authorize any officer
or officers, or any agent or agents, of the Corporation to enter into any
contract or to execute and deliver any instrument in the name of and on behalf
of the Corporation, and such authority may be general or confined to specific
instances.
Section 4. Loans. The Corporation may lend money to, or guarantee any
obligation of, or otherwise assist any officer or other employee of the
Corporation or of its subsidiary, including any officer or employee who is a
director of the Corporation or its subsidiary, whenever, in the judgment of the
directors, such loan, guaranty or assistance may reasonably be expected to
benefit the Corporation. The loan, guaranty or other assistance may be with or
without interest, and may be unsecured, or secured in such manner as the board
of directors shall approve, including, without
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limitation, a pledge of shares of stock of the Corporation. Nothing in this
section contained shall be deemed to deny, limit or restrict the powers of
guaranty or warranty of the Corporation at common law or under any statute.
Section 5. Fiscal Year. The fiscal year of the Corporation shall be
fixed by resolution of the board of directors.
Section 6. Corporate Seal. The board of directors shall provide a
corporate seal which shall be in the form of a circle and shall have inscribed
thereon the name of the Corporation and the words "Corporate Seal, Delaware".
The seal may be used by causing it or a facsimile thereof to be impressed or
affixed or reproduced or otherwise.
Section 7. Voting Securities Owned By Corporation. Voting securities in
any other corporation held by the Corporation shall be voted by the Chief
Executive Officer, unless the board of directors specifically confers authority
to vote with respect thereto, which authority may be general or confined to
specific instances, upon some other person or officer. Any person authorized to
vote securities shall have the power to appoint proxies, with general power of
substitution.
Section 8. Inspection of Books and Records. Any stockholder of record,
in person or by attorney or other agent, shall, upon written demand under oath
stating the purpose thereof, have the right during the usual hours for business
to inspect for any proper purpose the Corporation's stock ledger, a list of its
stockholders, and its other books and records, and to make copies or extracts
therefrom. A proper purpose shall mean any purpose reasonably related to such
person's interest as a stockholder. In every instance where an attorney or other
agent shall be the person who seeks the right to inspection, the demand under
oath shall be accompanied by a power of attorney or such other writing which
authorizes the attorney or other agent to so act on behalf of the stockholder.
The demand under oath shall be directed to the Corporation at its registered
office in the State of Delaware or at its principal place of business.
Section 9. Section Headings. Section headings in these By-laws are for
convenience of reference only and shall not be given any substantive effect in
limiting or otherwise construing any provision herein.
Section 10. Inconsistent Provisions. In the event that any provision of
these By-laws is or becomes inconsistent with any provision of the certificate
of incorporation, the General Corporation Law of the State of Delaware or any
other applicable law, the provision of these By-laws shall not be given any
effect to the extent of such inconsistency but shall otherwise be given full
force and effect.
ARTICLE VIII
AMENDMENTS
These By-laws may be amended, altered, or repealed and new By-laws
adopted at any meeting of the stockholders by a majority vote or by the board of
directors.
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EXHIBIT 4.1
ALLEGIANCE TELECOM, INC.
PURCHASE AGREEMENT
January 29, 1998
Morgan Stanley & Co. Incorporated
Salomon Brothers Inc
Bear, Stearns & Co. Inc.
Donaldson, Lufkin & Jenrette Securities Corporation
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Ladies and Gentlemen:
Allegiance Telecom, Inc., a Delaware corporation (the
"Company"), proposes to issue and sell to Morgan Stanley & Co. Incorporated,
Salomon Brothers Inc, Bear, Stearns & Co. Inc. and Donaldson, Lufkin & Jenrette
Securities Corporation (collectively, the "Initial Purchasers") 445,000 Units
(the "Units"). Each Unit consists of one 11 3/4% Senior Discount Note due 2008
(a "Note") to be issued pursuant to the provisions of an Indenture to be dated
as of February 3, 1998 (the "Indenture") between the Company and The Bank of New
York (the "Trustee") and one Warrant (a "Warrant") entitling the holder thereof
to purchase .0034224719 shares (collectively, the "Warrant Shares") of Common
Stock, par value $.01 per share, of the Company (collectively, the "Common
Stock"), to be issued pursuant to the provisions of a Warrant Agreement, to be
dated as of February 3, 1998 (the "Warrant Agreement"), between the Company and
The Bank of New York (the "Warrant Agent").
The Units will be offered without being registered under the
Securities Act of 1933, as amended (the "Securities Act"), to qualified
institutional buyers in compliance with the exemption from registration provided
by Rule 144A under the Securities Act, in offshore transactions in reliance on
Regulation S under the Securities Act ("Regulation S") and to institutional
accredited investors (as defined in Rule 501(a)(1), (2), (3) or (7) under the
Securities Act) that deliver a letter in the form annexed to the Final
Memorandum (as defined below).
<PAGE> 2
2
The Initial Purchasers and their direct and indirect
transferees will be entitled to the benefits of (i) a registration rights
agreement relating to the Notes (the "Notes Registration Rights Agreement"),
dated the date hereof, between the Company and the Initial Purchasers and (ii) a
registration rights agreement relating to the Warrants (the "Warrant
Registration Rights Agreement"), dated the date hereof, between the Company and
the Initial Purchasers.
In connection with the sale of the Units, the Company has
prepared a preliminary offering memorandum (the "Preliminary Memorandum") and
will prepare a final offering memorandum (the "Final Memorandum" and, with the
Preliminary Memorandum, each a "Memorandum") including a description of the
terms of the Units, the Notes and the Warrants and the Common Stock, the terms
of the offering and a description of the Company.
1. Representations and Warranties. The Company represents and
warrants to, and agrees with, you that:
(a) The Preliminary Memorandum does not contain and the Final
Memorandum, in the form used by the Initial Purchasers to confirm sales and on
the Closing Date (as defined in Section 4), will not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading, except that the representations and warranties set forth
in this paragraph do not apply to statements or omissions in either Memorandum
based upon information relating to any Initial Purchaser furnished to the
Company in writing by such Initial Purchaser through you expressly for use
therein.
(b) The Company has been duly incorporated, is validly
existing as a corporation in good standing under the laws of the State of
Delaware, has the corporate power and authority to own its property and to
conduct its business as described in each Memorandum and is duly qualified to
transact business and is in good standing in each jurisdiction in which the
conduct of its business or its ownership or leasing of property requires such
qualification, except to the extent that the failure to be so qualified or be in
good standing would not have a material adverse effect on the Company and its
subsidiaries, taken as a whole. Schedule A to the form of opinion of Kirkland &
Ellis, attached hereto as Exhibit A, sets forth each jurisdiction in which the
conduct of the Company's business or its ownership or leasing of property
requires it to be qualified to transact business and be in good standing.
(c) Each subsidiary of the Company has been duly incorporated,
is validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has the corporate power and authority to own
its property and to conduct its business as described in each Memorandum and is
duly qualified to transact business and is in good standing in each jurisdiction
in which the conduct of its business or its ownership or leasing of property
requires such qualification, except to the extent that the failure to be so
<PAGE> 3
3
qualified or be in good standing would not have a material adverse effect on the
Company and its subsidiaries, taken as a whole; all of the issued shares of
capital stock of each subsidiary of the Company have been duly and validly
authorized and issued, are fully paid and non-assessable and are owned directly
by the Company, free and clear of all liens, encumbrances, equities or claims.
There are no active subsidiaries of the Company other than those listed on
Schedule A to the form of opinion of Kirkland & Ellis, attached hereto as
Exhibit A and such Schedule A sets forth each jurisdiction in which the conduct
of the Company's business or its ownership or leasing of property requires any
subsidiary of the Company to be qualified to transact business and be in good
standing.
(d) This Agreement has been duly authorized, executed and
delivered by the Company.
(e) The Notes have been duly authorized and, when executed and
authenticated in accordance with the provisions of the Indenture and delivered
to and paid for by the Initial Purchasers in accordance with the terms of this
Agreement, will be valid and binding obligations of the Company enforceable in
accordance with their terms, subject to applicable bankruptcy, insolvency or
similar laws affecting creditors' rights generally and general principles of
equity, and will be entitled to the benefits of the Indenture and the Notes
Registration Rights Agreement.
(f) The Warrants have been duly authorized and, when executed
and countersigned by the Warrant Agent in accordance with the terms of the
Warrant Agreement and delivered to and paid for by the Initial Purchasers in
accordance with the terms of this Agreement, will be valid and binding
obligations of the Company enforceable in accordance with their terms, subject
to applicable bankruptcy, insolvency or similar laws affecting creditors' rights
generally and general principles of equity and will be entitled to the benefits
of the Warrant Agreement and the Warrant Registration Rights Agreement.
(g) The Warrant Shares have been duly authorized and reserved
for issuance upon the exercise of the Warrants and, when issued and delivered
upon exercise of the Warrants in accordance with the terms of the Warrant
Agreement, will be validly issued, fully paid and non-assessable and will not be
subject to any preemptive or similar rights or taxes, liens, charges and
security interests.
(h) Each of the Indenture and the Warrant Agreement has been
duly authorized and, when executed and delivered by the Company, will be a valid
and binding agreement of the Company, enforceable in accordance with its terms,
subject to applicable bankruptcy, insolvency or similar laws affecting
creditors' rights generally and general principles of equity.
<PAGE> 4
4
(i) Each of the Notes Registration Rights Agreement and the
Warrant Registration Rights Agreement has been duly authorized, executed and
delivered by, and is a valid and binding agreement of, the Company, enforceable
in accordance with its terms, subject to applicable bankruptcy, insolvency or
similar laws affecting creditors' rights generally and general principles of
equity and except as rights to indemnification and contribution may be limited
under applicable law.
(j) The execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement, the
Indenture, the Warrant Agreement, the Notes Registration Rights Agreement, the
Warrant Registration Agreement, the Notes and the Warrants (collectively, the
"Transaction Documents"), and the issuance, sale and delivery of the Units, the
Notes and the Warrants and the issuance of the Warrant Shares upon exercise of
the Warrants, will not contravene any provision of applicable law or the
certificate of incorporation or by-laws of the Company or any agreement or other
instrument binding upon the Company or any of its subsidiaries that is material
to the Company and its subsidiaries, taken as a whole, or any judgment, order or
decree of any governmental body, agency or court having jurisdiction over the
Company or any subsidiary, and no permit, license, consent, approval,
authorization or order of, or filing, declaration or qualification with, any
governmental body or agency is required for the performance by the Company of
its obligations under the Transaction Documents, except such as may be required
by the securities or Blue Sky laws of the various states in connection with the
offer and sale of the Units, the Notes or the Warrants or the issuance of the
Warrant Shares upon exercise of the Warrants and by Federal and state securities
laws with respect to the Company's obligations under the Notes Registration
Rights Agreement and Warrant Registration Rights Agreement. Schedule B to the
form of opinion of Kirkland & Ellis, attached hereto as Exhibit A, sets forth
all material agreements and instruments to which the Company or any of its
subsidiaries is a party.
(k) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the condition,
financial or otherwise, or in the earnings, business or operations of the
Company and its subsidiaries, taken as a whole, from that set forth in the Final
Memorandum. Furthermore, except in each case as described in the Final
Memorandum, (i) the Company and its subsidiaries have not incurred any material
liability or obligation, direct or contingent, nor entered into any material
transaction not in the ordinary course of business; (ii) neither the Company nor
any of its subsidiaries has purchased any of the Company's outstanding capital
stock, nor declared, paid or otherwise made any dividend or distribution of any
kind on the Company's capital stock; and (iii) there has not been any material
change in the capital stock, short-term debt or long-term debt of the Company
and its subsidiaries, taken as a whole.
(l) There are no legal or governmental proceedings pending or
threatened to which the Company or any of its subsidiaries is a party or to
which any of the properties of the
<PAGE> 5
5
Company or any of its subsidiaries is subject other than proceedings accurately
described in all material respects in each Memorandum and proceedings that would
not have a material adverse effect on the Company and its subsidiaries, taken as
a whole, or on the power or ability of the Company to perform its obligations
under the Transaction Documents or to consummate the transactions contemplated
by the Final Memorandum.
(m) Neither the Company nor any affiliate (as defined in Rule
501(b) of Regulation D under the Securities Act, an "Affiliate") of the Company
has directly, or through any agent, (i) sold, offered for sale, solicited offers
to buy or otherwise negotiated in respect of, any security (as defined in the
Securities Act) which is or will be integrated with the sale of the Units, Notes
or Warrants in a manner that would require the registration under the Securities
Act of the Units, the Notes or the Warrants or (ii) engaged in any form of
general solicitation or general advertising in connection with the offering of
the Units (as those terms are used in Regulation D under the Securities Act) or
in any manner involving a public offering within the meaning of Section 4(2) of
the Securities Act.
(n) The Company is not, and after giving effect to the
offering and sale of the Units and the application of the proceeds thereof as
described in the Final Memorandum, will not be an "investment company" as such
term is defined in the Investment Company Act of 1940, as amended.
(o) Assuming the accuracy of the representations and
warranties of the Initial Purchasers in Section 7 below, it is not necessary in
connection with the offer, sale and delivery of the Units to the Initial
Purchasers in the manner contemplated by this Agreement to register the Units,
the Notes or the Warrants under the Securities Act or to qualify the Indenture
under the Trust Indenture Act of 1939, as amended.
(p) The Company and its subsidiaries (i) are in compliance
with any and all applicable foreign, federal, state and local laws and
regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants, including all such laws and regulations concerning electromagnetic
radio frequency emissions ("Environmental Laws"), (ii) have received all
permits, licenses or other approvals required of them under applicable
Environmental Laws to conduct their respective businesses and (iii) are in
compliance with all terms and conditions of any such permit, license or
approval, except where such noncompliance with Environmental Laws, failure to
receive required permits, licenses or other approvals or failure to comply with
the terms and conditions of such permits, licenses or approvals would not,
singly or in the aggregate, have a material adverse effect on the Company and
its subsidiaries, taken as a whole.
<PAGE> 6
6
(q) There are no costs or liabilities associated with
Environmental Laws (including, without limitation, any capital or operating
expenditures required for clean-up, closure of properties or compliance with
Environmental Laws or any permit, license or approval, any related constraints
on operating activities and any potential liabilities to third parties) which
would, singly or in the aggregate, have a material adverse effect on the Company
and its subsidiaries, taken as a whole.
(r) None of the Company, its Affiliates or any person acting
on its or their behalf has engaged or will engage in any directed selling
efforts (within the meaning of Regulation S) with respect to the Units, the
Notes or the Warrants and the Company and its Affiliates and any person acting
on its or their behalf have complied with and will comply with the offering
restrictions requirement of Regulation S, except no representation, warranty or
agreement is made by the Company in this paragraph with respect to the Initial
Purchasers.
(s) Except as described in or contemplated by each Memorandum,
the Company and each of its subsidiaries (i) have all necessary licenses,
consents, authorizations, approvals, orders, certificates and permits of and
from, and have made all declarations and filings with, all federal, state, local
and other governmental, administrative and regulatory authorities, all
self-regulatory organizations and all courts and other tribunals, to own, lease,
license and use its properties and assets and to conduct its business in the
manner described in each Memorandum, except to the extent that the failure to
obtain such licenses, consents, authorizations, approvals, orders, certificates
and permits or make such declarations and filings would not have a material
adverse effect on the Company and its subsidiaries, taken as a whole and (ii)
have not received any notice of proceedings relating to revocation or
modification of any such license, consent, authorization, approval, order,
certificate or permit which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would reasonably be expected to result
in a material adverse change in the condition, financial or otherwise, or in the
earnings, business or operations of the Company and its subsidiaries, taken as a
whole.
(t) The Company and each of its subsidiaries maintain a system
of internal accounting controls sufficient to provide reasonable assurance that
(i) transactions are executed in accordance with management's general or
specific authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability; (iii) access to
assets is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(u) The Company and each of its subsidiaries have good and
marketable title in fee simple to all real property and good and marketable
title to all personal property owned by them which is material to the business
of the Company and its subsidiaries, taken as a
<PAGE> 7
7
whole, in each case free and clear of all liens, encumbrances and defects,
except such as are described in each Memorandum and such other liens as do not
materially affect the value of such property and do not interfere with the use
made and proposed to be made of such property by the Company and its
subsidiaries; and any real property and buildings held under lease by the
Company and its subsidiaries are held by them under valid, subsisting and
enforceable leases with such exceptions as are not material and do not
materially interfere with the use made and proposed to be made of such property
and buildings by the Company and its subsidiaries, in each case except as
described in or contemplated by each Memorandum.
(v) The Company and its subsidiaries own or possess, or can
acquire on reasonable terms, all material patents, patent rights, licenses,
inventions, copyrights, know-how (including trade secrets and other unpatented
and/or unpatentable proprietary or confidential information, systems or
procedures), trademarks, service marks and trade names currently employed by
them in connection with the business now operated by them, and neither the
Company nor any of its subsidiaries has received any notice of infringement of
or conflict with asserted rights of others with respect to any of the foregoing
which, singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would have a material adverse effect on the Company and its
subsidiaries, taken as a whole.
(w) No material labor dispute with the employees of the
Company or any of its subsidiaries exists or, to the knowledge of the Company,
is imminent; and the Company is not aware of any existing, threatened or
imminent labor disturbance by the employees of any of its principal suppliers,
manufacturers or contractors that could have a material adverse effect on the
Company and its subsidiaries, taken as a whole.
(x) The Company and each of its subsidiaries are insured by
insurers of recognized financial responsibility against such losses and risks
and in such amounts as are customary in the businesses in which they are
engaged; neither the Company nor any of its subsidiaries has been refused any
insurance coverage sought or applied for; and neither the Company nor any of its
subsidiaries has any reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would have a material and adverse effect on the Company
and its subsidiaries, taken as a whole, except as described in or contemplated
by each Memorandum.
(y) All licenses issued by the Federal Communications
Commission (the "FCC Licenses") required for the operation of the business of
the Company and its subsidiaries are in full force and effect and there are no
pending modifications, amendments or revocation proceedings which would
adversely affect the operations of the Company and its subsidiaries. All fees
due and payable to governmental authorities pursuant to the rules governing FCC
Licenses have been paid and no event has occurred with respect to the FCC
Licenses held by
<PAGE> 8
8
the Company and its subsidiaries which, with the giving of notice or the lapse
of time or both, would constitute grounds for revocation thereof. Each of the
Company and its subsidiaries is in compliance in all material respects with the
terms of the FCC Licenses, as applicable, and there is no condition, event or
occurrence existing, nor is there any proceeding being conducted of which the
Company has received notice, nor, to the Company's knowledge, is there any
proceeding threatened, by any governmental authority, which would cause the
termination, suspension, cancellation or nonrenewal of any of the FCC Licenses,
or the imposition of any penalty or fine by any regulatory authority. No
registrations, filings, applications, notices, transfers, consents, approvals,
audits, qualifications, waivers or other action of any kind is required by
virtue of the execution and delivery of the Transaction Documents or of the
consummation of the transactions contemplated hereby, other than as previously
obtained from the FCC (a) to avoid the loss of any such license, permit,
consent, concession or other authorization or any asset, property or right
pursuant to the terms thereof, or the violation or breach of any applicable law
thereto or (b) to enable the Company or any of its subsidiaries to hold and
enjoy the same after the Closing Date (as defined herein) in the conduct of its
business as conducted prior to the Closing Date.
(z) Each of the Company and its subsidiaries is solvent and
has tangible and intangible assets having a fair value in excess of the amount
required to pay its probable liabilities on its existing debts as they become
absolute and matured, and has access to adequate capital for the conduct of its
business and the ability to pay its debts from time to time incurred in
connection therewith as such debts mature. Neither the Company nor any of its
subsidiaries is contemplating either the filing of a petition by it under any
state or federal bankruptcy or insolvency laws or the liquidating of all or a
substantial portion of its property, and neither the Company nor any of its
subsidiaries has any knowledge of any person contemplating the filing of any
such petition against it.
(aa) The Units, Notes and Warrants satisfy the requirements
set forth in Rule 144A(d)(3) under the Securities Act.
2. Agreement to Sell and Purchase. The Company hereby agrees
to sell to the several Initial Purchasers, and each Initial Purchaser, upon the
basis of the representations and warranties herein contained, but subject to the
conditions hereinafter stated, agrees, severally and not jointly, to purchase
from the Company the respective amount of Units set forth in Schedule I hereto
opposite its name at a purchase price of $543.16955 per Unit, for an aggregate
purchase price of $241,710,449.75.
The Company hereby agrees that, without the prior written
consent of Morgan Stanley & Co. Incorporated on behalf of the Initial
Purchasers, it will not, during the period beginning on the date hereof and
continuing to and including the Closing Date, offer, sell, contract to sell or
otherwise dispose of any debt securities of the Company or warrants to
<PAGE> 9
9
purchase debt securities of the Company substantially similar to the Notes or
Common Stock of the Company or warrants to purchase Common Stock of the Company
(other than the sale of the Units, Notes and Warrants under this Agreement and
commercial paper issued in the ordinary course of business).
3. Terms of Offering. You have advised the Company that the
Initial Purchasers will make an offering of the Units purchased by the Initial
Purchasers hereunder on the terms to be set forth in the Final Memorandum, as
soon as practicable after this Agreement is entered into as in your judgment is
advisable.
4. Payment and Delivery. Payment for the Units shall be made
to the Company in Federal or other funds immediately available in New York City
against delivery of such Units for the respective accounts of the several
Initial Purchasers at 10:00 a.m., New York City time, on February 3, 1998 or at
such other time on the same or such other date, not later than February 17,
1998, as shall be designated in writing by you. The time and date of such
payment are hereinafter referred to as the "Closing Date."
Certificates for the Notes and the Warrants shall be in
definitive form or global form, as specified by you, and registered in such
names and in such denominations as you shall request in writing not later than
one full business day prior to the Closing Date. The certificates evidencing the
Notes and the Warrants shall be delivered to you on the Closing Date for the
respective accounts of the Initial Purchasers, with any transfer taxes payable
in connection with the transfer of the Units, Notes or the Warrants to the
Initial Purchasers duly paid, against payment of the purchase price therefor
plus accrued amortization of original issue discount, if any, to the date of
payment and delivery.
5. Conditions to the Initial Purchasers' Obligations. The
several obligations of the Initial Purchasers to purchase and pay for the Units
on the Closing Date are subject to the following conditions:
(a) Subsequent to the execution and delivery of this Agreement
and prior to the Closing Date:
(i) there shall not have occurred any downgrading, nor shall
any notice have been given of any intended or potential downgrading or
of any review for a possible change that does not indicate the
direction of the possible change, in the rating accorded any of the
Company's securities by any "nationally recognized statistical rating
organization," as such term is defined for purposes of Rule 436(g)(2)
under the Securities Act; and
<PAGE> 10
10
(ii) there shall not have occurred any change, or any
development involving a prospective change, in the condition, financial
or otherwise, or in the earnings, business or operations, of the
Company and its subsidiaries, taken as a whole, from that set forth in
the Final Memorandum (exclusive of any amendments or supplements
thereto subsequent to the date of this Agreement) that, in your
judgment, is material and adverse and that makes it, in your judgment,
impracticable to market the Units on the terms and in the manner
contemplated in the Final Memorandum.
(b) The Initial Purchasers shall have received on the Closing
Date a certificate, dated the Closing Date and signed by an executive officer of
the Company, to the effect set forth in Section 5(a)(i) above and to the effect
that the representations and warranties of the Company contained in this
Agreement are true and correct as of the Closing Date and that the Company has
complied with all of the agreements and satisfied all of the conditions on its
part to be performed or satisfied hereunder on or before the Closing Date.
The officer signing and delivering such certificate may rely
upon the best of his or her knowledge as to proceedings threatened.
(c) The Initial Purchasers shall have received on the Closing
Date an opinion of Kirkland & Ellis, outside counsel for the Company, dated the
Closing Date, to the effect set forth in Exhibit A.
(d) The Initial Purchasers shall have received on the Closing
Date an opinion of Swidler & Berlin, Chartered, regulatory counsel for the
Company, dated the Closing Date, to the effect set forth in Exhibit B.
The opinions of Kirkland & Ellis and Swidler & Berlin,
Chartered, shall be rendered to you at the request of the Company and shall so
state therein.
(e) The Initial Purchasers shall have received on the Closing
Date an opinion of Shearman & Sterling, counsel for the Initial Purchasers,
dated the Closing Date, in form and substance reasonably satisfactory to you.
(f) The Initial Purchasers shall have received on each of the
date hereof and the Closing Date a letter, dated the date hereof or the Closing
Date, as the case may be, in form and substance satisfactory to the Initial
Purchasers, from Arthur Andersen & Co., the Company's independent public
accountants, containing statements and information of the type ordinarily
included in accountants' "comfort letters" to underwriters with respect to the
financial statements and certain financial information contained in or
incorporated by reference into each Memorandum; provided that the letter
delivered on the Closing Date shall use a "cut-off date" not earlier than the
date hereof.
<PAGE> 11
11
(g) The Initial Purchasers shall have received such other
certificates and documents as they or their counsel may reasonably request.
6. Covenants of the Company. In further consideration of the
agreements of the Initial Purchasers contained in this Agreement, the Company
covenants with each Initial Purchaser as follows:
(a) To furnish to you in New York City, without charge, prior
to 10:00 a.m. New York City time on the business day next succeeding
the date of this Agreement and during the period mentioned in Section
6(c), as many copies of the Final Memorandum and any supplements or
amendments thereto as you may reasonably request.
(b) Before amending or supplementing either Memorandum, to
furnish to you a copy of each such proposed amendment or supplement and
not to use any such proposed amendment or supplement to which you
reasonably object.
(c) If, during such period after the date hereof and prior to
the date on which all of the Units, Notes or Warrants shall have been
sold by the Initial Purchasers, any event shall occur or condition
exist as a result of which it is necessary to amend or supplement the
Final Memorandum in order to make the statements therein, in the light
of the circumstances when the Final Memorandum is delivered to a
purchaser, not misleading, or if, in the opinion of counsel for the
Initial Purchasers, it is necessary to amend or supplement the Final
Memorandum to comply with applicable law, forthwith to prepare and
furnish, at its own expense, to the Initial Purchasers, either
amendments or supplements to the Final Memorandum so that the
statements in the Final Memorandum as so amended or supplemented will
not, in the light of the circumstances when the Final Memorandum is
delivered to a purchaser, be misleading or so that the Final
Memorandum, as amended or supplemented, will comply with applicable
law.
(d) To use its best effort to register or qualify the Units,
the Notes and the Warrants for offer and sale under all applicable
state securities or "blue sky" laws of such jurisdictions as you shall
reasonably request; provided, however, that the Company shall not be
required to (i) qualify as a foreign corporation or as a dealer in
securities in any jurisdiction where it would not otherwise be required
to qualify but for this Section 6(d), (ii) file any general consent to
service of process or (iii) subject itself to taxation in any such
jurisdiction if it is not so subject.
(e) Whether or not the transactions contemplated in this
Agreement are consummated or this Agreement is terminated, to pay or
cause to be paid all expenses incident to the performance of its
obligations under this Agreement, including: (i) the
<PAGE> 12
12
fees, disbursements and expenses of the Company's counsel and the
Company's accountants in connection with the issuance and sale of the
Units and all other fees or expenses in connection with the preparation
of each Memorandum and all amendments and supplements thereto,
including all printing costs associated therewith, and the delivering
of copies thereof to the Initial Purchasers, in the quantities herein
above specified, (ii) all costs and expenses related to the transfer
and delivery of the Notes and the Warrants to the Initial Purchasers,
including any transfer or other taxes payable thereon, (iii) the cost
of printing or producing any Blue Sky or legal investment memorandum in
connection with the offer and sale of the Units, the Notes and the
Warrants under state securities laws and all expenses in connection
with the qualification of the Units, the Notes and the Warrants for
offer and sale under state securities laws as provided in Section 6(d)
hereof, including filing fees and the reasonable fees and disbursements
of counsel for the Initial Purchasers in connection with such
qualification and in connection with the Blue Sky or legal investment
memorandum, (iv) any fees charged by rating agencies for the rating of
the Notes, (v) all document production charges and expenses of counsel
to the Initial Purchasers (but not including their fees for
professional services) in connection with the preparation of this
Agreement, (vi) the fees and expenses, if any, incurred in connection
with the admission of the Units, the Notes and the Warrants for trading
in PORTAL or any appropriate market system, (vii) the costs and charges
of the Trustee, the Warrant Agent and any transfer agent, registrar or
depositary, (viii) the cost of the preparation, issuance and delivery
of the Notes and the Warrants, (ix) fifty percent of the costs and
expenses relating to investor presentations on any "road show"
undertaken in connection with the marketing of the offering of the
Units, including, without limitation, expenses associated with the
production of road show slides and graphics, fees and expenses of any
consultants engaged in connection with the road show presentations with
the prior approval of the Company, travel and lodging expenses of the
representatives and officers of the Company, the Initial Purchasers and
any such consultants, but excluding the cost of any aircraft chartered
in connection with the road show which will be paid for by the Company,
and (x) all other costs and expenses incident to the performance of the
obligations of the Company hereunder for which provision is not
otherwise made in this Section. It is understood, however, that except
as provided in this Section, Section 8, and the last paragraph of
Section 10, the Initial Purchasers will pay all of their costs and
expenses, including fees and disbursements of their counsel, transfer
taxes payable on resale of any of the Units by them and any advertising
expenses connected with any offers they may make.
(f) Neither the Company nor any Affiliate will sell, offer for
sale or solicit offers to buy or otherwise negotiate in respect of any
security (as defined in the Securities Act) which could be integrated
with the sale of the Units, the Notes or the
<PAGE> 13
13
Warrants in a manner which would require the registration under the
Securities Act of the Units, the Notes or the Warrants.
(g) Not to solicit any offer to buy or offer or sell the
Units, the Notes or the Warrants by means of any form of general
solicitation or general advertising (as those terms are used in
Regulation D under the Securities Act) or in any manner involving a
public offering within the meaning of Section 4(2) of the Securities
Act.
(h) While any of the Units, the Notes or the Warrants remain
"restricted securities" within the meaning of the Securities Act, to
make available, upon request, to any seller of such Units, the Notes or
the Warrants the information specified in Rule 144A(d)(4) under the
Securities Act, unless the Company is then subject to Section 13 or
15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act").
(i) None of the Company, its Affiliates or any person acting
on its or their behalf (other than the Initial Purchasers) will engage
in any directed selling efforts (as that term is defined in Regulation
S) with respect to the Units, the Notes or the Warrants, and the
Company and its Affiliates and each person acting on its or their
behalf (other than the Initial Purchasers) will comply with the
offering restrictions requirement of Regulation S.
(j) The Company will not, and will not permit any of its
affiliates (as defined in Rule 144A under the Securities Act) to resell
any of the Registrable Securities (as such term is defined in the Notes
Registration Rights Agreement) that have been reacquired by any of
them.
(k) If requested by you, to use its best efforts to permit the
Units, the Notes and the Warrants to be designated PORTAL securities in
accordance with the rules and regulations adopted by the National
Association of Securities Dealers, Inc.
relating to trading in the PORTAL Market.
(l) The Company will, and will cause the Warrant Agent (with
respect to the Warrants) and the Transfer Agent and Registrar (with
respect to the Warrant Shares) to, refuse any transfer of Warrants or
Warrant Shares, as applicable, sold pursuant to Regulation S if such
transfer is not made in accordance with the provisions of Regulation S.
7. Offering of Units; Restrictions on Transfer. (a) Each
Initial Purchaser, severally and not jointly, represents and warrants that such
Initial Purchaser is a qualified institutional buyer as defined in Rule 144A
under the Securities Act (a "QIB"). Each Initial
<PAGE> 14
14
Purchaser, severally and not jointly, agrees with the Company that (i) it will
not solicit offers for, or offer or sell, any Units by any form of general
solicitation or general advertising (as those terms are used in Regulation D
under the Securities Act) or in any manner involving a public offering within
the meaning of Section 4(2) of the Securities Act and (ii) it will solicit
offers for such Units only from, and will offer such Units only to, persons that
it reasonably believes to be (A) in the case of offers inside the United States,
(1) QIBs or (2) other institutional accredited investors (as defined in Rule
501(a) (1), (2), (3) or (7) under the Securities Act) ("institutional accredited
investors") that, prior to their purchase of the Units, deliver to such Initial
Purchaser a letter containing the representations and agreements set forth in
Appendix A to the Memorandum and (B) in the case of offers outside the United
States, to persons other than U.S. persons ("foreign purchasers," which term
shall include dealers or other professional fiduciaries in the United States
acting on a discretionary basis for foreign beneficial owners (other than an
estate or trust)) in reliance upon Regulation S under the Securities Act that,
in each case, in purchasing such Units are deemed to have represented and agreed
as provided in the Final Memorandum under the caption "Transfer Restrictions."
(b) Each Initial Purchaser, severally and not jointly,
represents, warrants, and agrees with respect to offers and sales outside the
United States that:
(i) such Initial Purchaser understands that no action has been
or will be taken in any jurisdiction by the Company that would permit a
public offering of the Units, the Notes or the Warrants, or possession
or distribution of either Memorandum or any other offering or publicity
material relating to the Units, the Notes or the Warrants, in any
country or jurisdiction where action for that purpose is required;
(ii) such Initial Purchaser will comply with all applicable
laws and regulations in each jurisdiction in which it acquires, offers,
sells or delivers the Units, the Notes or the Warrants or has in its
possession or distributes either Memorandum or any such other material,
in all cases at its own expense;
(iii) the Units, the Notes and the Warrants have not been
registered under the Securities Act and may not be offered or sold
within the United States or to, or for the account or benefit of, U.S.
persons except in accordance with Rule 144A or Regulation S under the
Securities Act or pursuant to another exemption from the registration
requirements of the Securities Act;
(iv) such Initial Purchaser has offered the Units and will
offer and sell the Units (A) as part of their distribution at any time
and (B) otherwise until 40 days after the Closing Date with respect to
the Notes (or if after such date, the date the Notes and Warrants
become separately transferable), and one year after the Closing Date
with respect to the Warrants, only in accordance with Rule 903 of
Regulation S or another
<PAGE> 15
15
exemption from the registration requirements of the Securities Act.
Accordingly, neither such Initial Purchaser, its Affiliates nor any
persons acting on its or their behalf have engaged or will engage in
any directed selling efforts (within the meaning of Regulation S) with
respect to the Units, the Notes or the Warrants, and any such Initial
Purchaser, its Affiliates and any such persons have complied and will
comply with the offering restrictions requirement of Regulation S;
(v) such Initial Purchaser has (A) not offered or sold and,
prior to the date six months after the Closing Date, will not offer or
sell any Units, Notes or Warrants to persons in the United Kingdom
except to persons whose ordinary activities involve them in acquiring,
holding, managing or disposing of investments (as principal or agent)
for the purposes of their businesses or otherwise in circumstances
which have not resulted and will not result in an offer to the public
in the United Kingdom within the meaning of the Public Offers of
Securities Regulations 1995; (B) complied and will comply with all
applicable provisions of the Financial Services Act 1986 with respect
to anything done by it in relation to the Units, the Notes or the
Warrants in, from or otherwise involving the United Kingdom; and (C)
only issued or passed on and will only issue or pass on in the United
Kingdom any document received by it in connection with the issue of the
Units, the Notes or the Warrants to a person who is of a kind described
in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996 or is a person to whom such
document may otherwise lawfully be issued or passed on;
(vi) such Initial Purchaser understands that the Units, the
Notes and the Warrants have not been and will not be registered under
the Securities and Exchange Law of Japan, and represents that it has
not offered or sold, and agrees not to offer or sell, directly or
indirectly, any Units, Notes or Warrants in Japan or for the account of
any resident thereof except pursuant to any exemption from the
registration requirements of the Securities and Exchange Law of Japan
and otherwise in compliance with applicable provisions of Japanese law;
and
(vii) such Initial Purchaser agrees that, at or prior to
confirmation of sales of the Units, it will have sent to each
distributor, dealer or person receiving a selling concession, fee or
other remuneration that purchases Units from it during the restricted
period a confirmation or notice to substantially the following effect:
"The Units, the Notes and the Warrants covered hereby have not been
registered under the U.S. Securities Act of 1933 (the "Securities Act")
and may not be offered and sold within the United States or to, or for
the account or benefit of, U.S. persons (i) as part of their
distribution at any time or (ii) otherwise until 40 days after the
closing date with respect to the Notes (or if after such date, the date
the Notes and Warrants become
<PAGE> 16
16
separately transferable) and one year after the closing date with
respect to the Warrants, except in either case in accordance with
Regulation S (or Rule 144A, if available) under the Securities Act.
Terms used above have the meaning given to them by Regulation S."
Terms used in this Section 7(b) have the meanings given to them by Regulation S.
8. Indemnification and Contribution. (a) The Company agrees to
indemnify and hold harmless each Initial Purchaser, and each person, if any, who
controls any Initial Purchaser within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act from and against any and all
losses, claims, damages and liabilities (including, without limitation, any
legal or other expenses reasonably incurred in connection with defending or
investigating any such action or claim) caused by any untrue statement or
alleged untrue statement of a material fact contained in either Memorandum (as
amended or supplemented if the Company shall have furnished any amendments or
supplements thereto), or caused by any omission or alleged omission to state
therein a material fact necessary to make the statements therein in the light of
the circumstances under which they were made not misleading, except insofar as
such losses, claims, damages or liabilities are caused by any such untrue
statement or omission or alleged untrue statement or omission based upon
information relating to any Initial Purchaser furnished to the Company in
writing by such Initial Purchaser through you expressly for use therein.
(b) Each Initial Purchaser agrees, severally and not jointly,
to indemnify and hold harmless the Company, its directors, its officers and each
person, if any, who controls the Company within the meaning of either Section 15
of the Securities Act or Section 20 of the Exchange Act to the same extent as
the foregoing indemnity from the Company to such Initial Purchaser, but only
with reference to information relating to such Initial Purchaser furnished to
the Company in writing by such Initial Purchaser through you expressly for use
in either Memorandum or any amendments or supplements thereto.
(c) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of which
indemnity may be sought pursuant to Section 8(a) or 8(b), such person (the
"indemnified party") shall promptly notify the person against whom such
indemnity may be sought (the "indemnifying party") in writing and the
indemnifying party, upon request of the indemnified party, shall retain counsel
reasonably satisfactory to the indemnified party to represent the indemnified
party and any others the indemnifying party may designate in such proceeding and
shall pay the fees and disbursements of such counsel related to such proceeding.
In any such proceeding, any indemnified party shall have the right to retain its
own counsel, but the fees and expenses of such counsel shall be at the expense
of such indemnified party unless (i) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel or (ii) the
named parties to
<PAGE> 17
17
any such proceeding (including any impleaded parties) include both the
indemnifying party and the indemnified party and representation of both parties
by the same counsel would be inappropriate due to actual or potential differing
interests between them. It is understood that the indemnifying party shall not,
in respect of the legal expenses of any indemnified party in connection with any
proceeding or related proceedings in the same jurisdiction, be liable for the
fees and expenses of more than one separate firm (in addition to any local
counsel) for all such indemnified parties and that all such fees and expenses
shall be reimbursed as they are incurred. Such firm shall be designated in
writing by Morgan Stanley & Co. Incorporated, in the case of parties indemnified
pursuant to Section 8(a) above, and by the Company, in the case of parties
indemnified pursuant to Section 8(b). The indemnifying party shall not be liable
for any settlement of any proceeding effected without its written consent, but
if settled with such consent or if there be a final judgment for the plaintiff,
the indemnifying party agrees to indemnify the indemnified party from and
against any loss or liability by reason of such settlement or judgment.
Notwithstanding the foregoing sentence, if at any time an indemnified party
shall have requested an indemnifying party to reimburse the indemnified party
for fees and expenses of counsel as contemplated by the second and third
sentences of this paragraph, the indemnifying party agrees that it shall be
liable for any settlement of any proceeding effected without its written consent
if (i) such settlement is entered into more than 60 days after receipt by such
indemnifying party of the aforesaid request and (ii) such indemnifying party
shall not have reimbursed the indemnified party in accordance with such request
prior to the date of such settlement. No indemnifying party shall, without the
prior written consent of the indemnified party, effect any settlement of any
pending or threatened proceeding in respect of which any indemnified party is or
could have been a party and indemnity could have been sought hereunder by such
indemnified party, unless such settlement includes an unconditional release of
such indemnified party from all liability on claims that are the subject matter
of such proceeding.
(d) To the extent the indemnification provided for in Section
8(a) or 8(b) is unavailable to an indemnified party or insufficient in respect
of any losses, claims, damages or liabilities referred to therein, then each
indemnifying party under such paragraph, in lieu of indemnifying such
indemnified party thereunder, shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages or
liabilities (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company on the one hand and the Initial Purchasers on
the other hand from the offering of the Notes or (ii) if the allocation provided
by clause 8(d)(i) above is not permitted by applicable law, in such proportion
as is appropriate to reflect not only the relative benefits referred to in
clause 8(d)(i) above but also the relative fault of the Company on the one hand
and of the Initial Purchasers on the other hand in connection with the
statements or omissions that resulted in such losses, claims, damages or
liabilities, as well as any other relevant equitable considerations. The
relative benefits received by the Company on the one hand and the Initial
Purchasers on the other hand in connection with the offering of the Units shall
be deemed to be in the same
<PAGE> 18
18
respective proportions as the net proceeds from the offering of the Units
(before deducting expenses) received by the Company and the total discounts and
commissions received by the Initial Purchasers in respect thereof bear to the
aggregate offering price of the Units. The relative fault of the Company on the
one hand and of the Initial Purchasers on the other hand shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or by the Initial Purchasers and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission. The Initial Purchasers'
respective obligations to contribute pursuant to this Section 8 are several in
proportion to the respective number of Units they have purchased hereunder, and
not joint.
(e) The Company and the Initial Purchasers agree that it would
not be just or equitable if contribution pursuant to this Section 8 were
determined by pro rata allocation (even if the Initial Purchasers were treated
as one entity for such purpose) or by any other method of allocation that does
not take account of the equitable considerations referred to in Section 8(d).
The amount paid or payable by an indemnified party as a result of the losses,
claims, damages and liabilities referred to in Section 8(d) shall be deemed to
include, subject to the limitations set forth above, any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
Section 8, no Initial Purchaser shall be required to contribute any amount in
excess of the amount by which the total price at which the Units resold by it in
the initial placement of such Units were offered to investors exceeds the amount
of any damages that such Initial Purchaser has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. The remedies
provided for in this Section 8 are not exclusive and shall not limit any rights
or remedies which may otherwise be available to any indemnified party at law or
in equity.
(f) The indemnity and contribution provisions contained in
this Section 8 and the representations, warranties and other statements of the
Company contained in this Agreement shall remain operative and in full force and
effect regardless of (i) any termination of this Agreement, (ii) any
investigation made by or on behalf of any Initial Purchasers or any person
controlling any Initial Purchasers or by or on behalf of the Company, its
officers or directors or any person controlling the Company and (iii) acceptance
of and payment for any of the Units.
9. Termination. This Agreement shall be subject to termination
by notice given by you to the Company, if (a) after the execution and delivery
of this Agreement and prior to the Closing Date (i) trading generally shall have
been suspended or materially limited
<PAGE> 19
19
on or by, as the case may be, any of the New York Stock Exchange, the American
Stock Exchange, the National Association of Securities Dealers, Inc., the
Chicago Board of Options Exchange, the Chicago Mercantile Exchange or the
Chicago Board of Trade, (ii) trading of any securities of the Company shall have
been suspended on any exchange or in any over-the-counter market, (iii) a
general moratorium on commercial banking activities in New York shall have been
declared by either Federal or New York State authorities or (iv) there shall
have occurred any outbreak or escalation of hostilities or any change in
financial markets or any calamity or crisis that, in your judgment, is material
and adverse and (b) in the case of any of the events specified in clauses
9(a)(i) through 9(a)(iv), such event singly or together with any other such
event makes it, in your judgment, impracticable to market the Units on the terms
and in the manner contemplated in the Final Memorandum.
10. Effectiveness; Defaulting Initial Purchasers. This
Agreement shall become effective upon the execution and delivery hereof by the
parties hereto.
If, on the Closing Date, any one or more of the Initial
Purchasers shall fail or refuse to purchase Units that it or they have agreed to
purchase hereunder on such date, and the aggregate number of Units which such
defaulting Initial Purchaser or Initial Purchasers agreed but failed or refused
to purchase is not more than one-tenth of the aggregate number of Units to be
purchased on such date, the other Initial Purchasers shall be obligated
severally in the proportions that the number of Units set forth opposite their
respective names in Schedule I bears to the aggregate number of Units set forth
opposite the names of all such non-defaulting Initial Purchasers, or in such
other proportions as you may specify, to purchase the Units which such
defaulting Initial Purchaser or Initial Purchasers agreed but failed or refused
to purchase on such date; provided that in no event shall the number of Units
that any Initial Purchaser has agreed to purchase pursuant to this Agreement be
increased pursuant to this Section 10 by an amount in excess of one-ninth of
such number of Units without the written consent of such Initial Purchaser. If,
on the Closing Date any Initial Purchaser or Initial Purchasers shall fail or
refuse to purchase Units which it or they have agreed to purchase hereunder on
such date and the aggregate number of Units with respect to which such default
occurs is more than one-tenth of the aggregate number of Units to be purchased
on such date and arrangements satisfactory to you and the Company for the
purchase of such Units are not made within 36 hours after such default, this
Agreement shall terminate without liability on the part of any non-defaulting
Initial Purchaser or of the Company. In any such case either you or the Company
shall have the right to postpone the Closing Date, but in no event for longer
than seven days, in order that the required changes, if any, in the Final
Memorandum or in any other documents or arrangements may be effected. Any action
taken under this paragraph shall not relieve any defaulting Initial Purchaser
from liability in respect of any default of such Initial Purchaser under this
Agreement.
<PAGE> 20
20
If this Agreement shall be terminated by the Initial
Purchasers, or any of them, because of any failure or refusal on the part of the
Company to comply with the terms or to fulfill any of the conditions of this
Agreement, or if for any reason the Company shall be unable to perform its
obligations under this Agreement, the Company will reimburse the Initial
Purchasers or such Initial Purchasers as have so terminated this Agreement with
respect to themselves, severally, for all out-of-pocket expenses (including the
fees and disbursements of their counsel) reasonably incurred by such Initial
Purchasers in connection with this Agreement or the offering contemplated
hereunder.
11. Counterparts. This Agreement may be signed in any number
of counterparts, each of which shall be an original, with the same effect as if
the signatures thereto and hereto were upon the same instrument.
12. Applicable Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York.
13. Headings. The headings of the sections of this Agreement
have been inserted for convenience of reference only and shall not be deemed a
part of this Agreement.
14. Notice. All notices and other communications under this
Agreement shall be in writing, and, if sent to the Initial Purchasers, be
mailed, delivered or sent by facsimile transmission to:
Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Attention: High Yield New Issue Group
Facsimile Number: (212) 761-0587
or, if sent to the Company, will be mailed, delivered or sent by facsimile
transmission to the Company at:
Allegiance Telecom, Inc.
1950 Stemmons Frwy.
Dallas, Texas 75207
Attention: Chief Financial Officer
Facsimile Number: (214) 853-7110
<PAGE> 21
Very truly yours,
ALLEGIANCE TELECOM, INC.
By /s/ ROYCE J. HOLLAND
-----------------------
Name: Royce J. Holland
Title: Chairman and
Chief Executive
Officer
Agreed, as of the first date written above
Morgan Stanley & Co.
Incorporated
Salomon Brothers Inc
Bear, Stearns & Co. Inc.
Donaldson, Lufkin & Jenrette
Securities Corporation
By Morgan Stanley & Co.
Incorporated
By /s/ JAMES D. ALLEN
-----------------------
Name: James D. Allen
Title: Vice President
<PAGE> 22
SCHEDULE I
<TABLE>
<CAPTION>
Number of Units
Initial Purchaser To Be Purchased
----------------- ---------------
<S> <C>
Morgan Stanley & Co. Incorporated 222,500
Salomon Brothers Inc 135,500
Bear, Stearns & Co. Inc. 44,500
Donaldson, Lufkin & Jenrette 44,500
Securities Corporation
-------
Total......................... 445,000
=======
</TABLE>
<PAGE> 23
EXHIBIT A
<PAGE> 24
EXHIBIT B
<PAGE> 1
EXHIBIT 4.4
- --------------------------------------------------------------------------------
NOTES REGISTRATION RIGHTS AGREEMENT
Dated January 29, 1998
between
ALLEGIANCE TELECOM, INC.
and
MORGAN STANLEY & CO. INCORPORATED
SALOMON BROTHERS INC
BEAR, STEARNS & CO. INC.
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
<PAGE> 2
NOTES REGISTRATION RIGHTS AGREEMENT
THIS NOTES REGISTRATION RIGHTS AGREEMENT (the "Agreement") is
made and entered into January 29, 1998, between ALLEGIANCE TELECOM, INC., a
Delaware corporation (the "Company"), and MORGAN STANLEY & CO. INCORPORATED,
SALOMON BROTHERS INC, BEAR, STEARNS & CO. INC. and DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION (the "Initial Purchasers").
This Agreement is made pursuant to the Purchase Agreement
dated January 29, 1998, between the Company and the Initial Purchasers (the
"Purchase Agreement"), which provides for the sale by the Company to the Initial
Purchasers of an aggregate of $445,000,000 principal amount at maturity of the
Company's 11 3/4% Senior Discount Notes due 2008 (the "Securities"). In order to
induce the Initial Purchasers to enter into the Purchase Agreement, the Company
has agreed to provide to the Initial Purchasers and their direct and indirect
transferees the registration rights set forth in this Agreement. The execution
of this Agreement is a condition to the closing under the Purchase Agreement.
In consideration of the foregoing, the parties hereto agree as
follows:
1. Definitions.
As used in this Agreement, the following capitalized defined
terms shall have the following meanings:
"1933 Act" shall mean the Securities Act of 1933, as amended
from time to time.
"1934 Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time.
"Closing Date" shall mean the Closing Date as defined in the
Purchase Agreement.
"Company" shall have the meaning set forth in the preamble to
this Agreement and shall also include the Company's successors.
"Exchange Offer" shall mean the exchange offer by the Company
of Exchange Securities for Registrable Securities pursuant to Section
2(a) hereof.
<PAGE> 3
2
"Exchange Offer Registration" shall mean a registration under
the 1933 Act effected pursuant to Section 2(a) hereof.
"Exchange Offer Registration Statement" shall mean an exchange
offer registration statement on Form S-4 (or, if applicable, on another
appropriate form) and all amendments and supplements to such
registration statement, in each case including the Prospectus contained
therein, all exhibits thereto and all material incorporated by
reference therein.
"Exchange Securities" shall mean securities issued by the
Company under the Indenture containing terms identical to the
Securities (except that (i) interest thereon shall accrue from the last
date on which interest was paid on the Securities or, if no such
interest has been paid, from August 15, 2003 and (ii) the Exchange
Securities will not provide for an increase in the rate of interest and
will not contain restrictions on transfer) and to be offered to Holders
of Securities in exchange for Securities pursuant to the Exchange
Offer.
"Holder" shall mean the Initial Purchasers, for so long as
they own any Registrable Securities, and each of their successors,
assigns and direct and indirect transferees who become registered
owners of Registrable Securities under the Indenture; provided that for
purposes of Sections 4 and 5 of this Agreement, the term "Holder" shall
include Participating Broker-Dealers (as defined in Section 4(a)).
"Indenture" shall mean the Indenture relating to the
Securities dated as of February 3, 1998 between the Company and The
Bank of New York, as trustee, and as the same may be amended from time
to time in accordance with the terms thereof.
"Initial Purchasers" shall have the meaning set forth in the
preamble to this Agreement.
"Majority Holders" shall mean the Holders of a majority of the
aggregate principal amount at maturity of outstanding Registrable
Securities; provided that whenever the consent or approval of Holders
of a specified percentage of Registrable Securities is required
hereunder, Registrable Securities held by the Company or any of its
subsidiaries shall not be counted in determining whether such consent
or approval was given by the Holders of such required percentage or
amount.
"Person" shall mean an individual, partnership, corporation,
limited liability company, trust or unincorporated organization, or a
government or agency or political subdivision thereof.
<PAGE> 4
3
"Prospectus" shall mean the prospectus included in a
Registration Statement, including any preliminary prospectus, and any
such prospectus as amended or supplemented by any prospectus
supplement, including a prospectus supplement with respect to the terms
of the offering of any portion of the Registrable Securities covered by
a Shelf Registration Statement, and by all other amendments and
supplements to such prospectus, and in each case including all material
incorporated by reference therein.
"Purchase Agreement" shall have the meaning set forth in the
preamble to this Agreement.
"Registrable Securities" shall mean the Securities; provided,
however, that the Securities shall cease to be Registrable Securities
(i) when a Registration Statement with respect to such Securities shall
have been declared effective under the 1933 Act and such Securities
shall have been disposed of pursuant to such Registration Statement,
(ii) when such Securities have been sold to the public pursuant to Rule
144 (or any similar provision then in force, but not Rule 144A) under
the 1933 Act or (iii) when such Securities shall have ceased to be
outstanding.
"Registration Expenses" shall mean any and all expenses
incident to performance of or compliance by the Company with this
Agreement, including without limitation: (i) all SEC, stock exchange or
National Association of Securities Dealers, Inc. registration and
filing fees, (ii) all fees and expenses incurred in connection with
compliance with state securities or blue sky laws (including reasonable
fees and disbursements of counsel for any underwriters or Holders in
connection with blue sky qualification of any of the Exchange
Securities or Registrable Securities), (iii) all expenses of any
Persons in preparing or assisting in preparing, word processing,
printing and distributing any Registration Statement, any Prospectus,
any amendments or supplements thereto, any underwriting agreements,
securities sales agreements and other documents relating to the
performance of and compliance with this Agreement, (iv) all rating
agency fees, (v) all fees and disbursements relating to the
qualification of the Indenture under applicable securities laws, (vi)
the fees and disbursements of the Trustee and its counsel, (vii) the
fees and disbursements of counsel for the Company and, in the case of a
Shelf Registration Statement, the fees and disbursements of one counsel
for the Holders (which counsel shall be selected by the Majority
Holders and which counsel may also be counsel for the Initial
Purchasers) and (viii) the fees and disbursements of the independent
public accountants of the Company, including the expenses of any
special audits or "cold comfort" letters required by or incident to
such performance and compliance, but excluding fees and expenses of
counsel to the underwriters (other than fees and expenses set forth in
clause (ii) above) or the Holders
<PAGE> 5
4
and underwriting discounts and commissions and transfer taxes, if any,
relating to the sale or disposition of Registrable Securities by a
Holder.
"Registration Statement" shall mean any registration statement
of the Company that covers any of the Exchange Securities or
Registrable Securities pursuant to the provisions of this Agreement and
all amendments and supplements to any such Registration Statement,
including post-effective amendments, in each case including the
Prospectus contained therein, all exhibits thereto and all material
incorporated by reference therein.
"SEC" shall mean the Securities and Exchange Commission.
"Shelf Registration" shall mean a registration effected
pursuant to Section 2(b) hereof.
"Shelf Registration Statement" shall mean a "shelf"
registration statement of the Company pursuant to the provisions of
Section 2(b) of this Agreement which covers all of the Registrable
Securities (but no other securities unless approved by the Holders
whose Registrable Securities are covered by such Shelf Registration
Statement) on an appropriate form under Rule 415 under the 1933 Act, or
any similar rule that may be adopted by the SEC, and all amendments and
supplements to such registration statement, including post-effective
amendments, in each case including the Prospectus contained therein,
all exhibits thereto and all material incorporated by reference
therein.
"TIA" shall have the meaning set forth in Section 3(l) hereof.
"Trustee" shall mean the trustee with respect to the
Securities under the Indenture.
"Underwriter" shall have the meaning set forth in Section 3
hereof.
"Underwritten Registration" or "Underwritten Offering" shall
mean a registration in which Registrable Securities are sold to an
Underwriter for reoffering to the public.
2. Registration Under the 1933 Act.
(a) To the extent not prohibited by any applicable law or
applicable interpretation of the Staff of the SEC, the Company shall use its
best efforts to cause to be filed an Exchange Offer Registration Statement
covering the offer by the Company to the Holders to exchange all of the
Registrable Securities for Exchange Securities and to have such
<PAGE> 6
5
Registration Statement remain effective until the closing of the Exchange Offer.
The Company shall commence the Exchange Offer promptly after the Exchange Offer
Registration Statement has been declared effective by the SEC and use its best
efforts to have the Exchange Offer consummated not later than 60 days after such
effective date. The Company shall commence the Exchange Offer by mailing the
related exchange offer Prospectus and accompanying documents to each Holder
stating, in addition to such other disclosures as are required by applicable
law:
(i) that the Exchange Offer is being made pursuant to this
Notes Registration Rights Agreement and that all Registrable Securities
validly tendered will be accepted for exchange;
(ii) the dates of acceptance for exchange (which shall be a
period of at least 20 days from the date such notice is mailed) (the
"Exchange Dates");
(iii) that any Registrable Security not tendered will remain
outstanding and continue to accrue interest, but will not retain any
rights under this Notes Registration Rights Agreement;
(iv) that Holders electing to have a Registrable Security
exchanged pursuant to the Exchange Offer will be required to surrender
such Registrable Security, together with the enclosed letters of
transmittal, to the institution and at the address (located in the
Borough of Manhattan, The City of New York) specified in the notice
prior to the close of business on the last Exchange Date; and
(v) that Holders will be entitled to withdraw their election,
not later than the close of business on the last Exchange Date, by
sending to the institution and at the address (located in the Borough
of Manhattan, The City of New York) specified in the notice a telegram,
telex, facsimile transmission or letter setting forth the name of such
Holder, the principal amount at maturity of Registrable Securities
delivered for exchange and a statement that such Holder is withdrawing
his election to have such Securities exchanged.
As soon as practicable after the last Exchange Date, the
Company shall:
(i) accept for exchange Registrable Securities or portions
thereof tendered and not validly withdrawn pursuant to the Exchange
Offer; and
(ii) deliver, or cause to be delivered, to the Trustee for
cancellation all Registrable Securities or portions thereof so accepted
for exchange by the Company and issue, and cause the Trustee to
promptly authenticate and mail to each Holder, an
<PAGE> 7
6
Exchange Security equal in principal amount at maturity to the
principal amount at maturity of the Registrable Securities surrendered
by such Holder.
The Company shall use its best efforts to complete the Exchange Offer as
provided above and shall comply with the applicable requirements of the 1933
Act, the 1934 Act and other applicable laws and regulations in connection with
the Exchange Offer. The Exchange Offer shall not be subject to any conditions,
other than that the Exchange Offer does not violate applicable law or any
applicable interpretation of the Staff of the SEC. The Company shall inform the
Initial Purchasers of the names and addresses of the Holders to whom the
Exchange Offer is made, and the Initial Purchasers shall have the right, subject
to applicable law, to contact such Holders and otherwise facilitate the tender
of Registrable Securities in the Exchange Offer.
(b) In the event that (i) the Company determines that the
Exchange Offer Registration provided for in Section 2(a) above is not available
or may not be consummated as soon as practicable after the last Exchange Date
because it would violate applicable law or the applicable interpretations of the
Staff of the SEC, (ii) the Exchange Offer is not for any other reason
consummated by August 3, 1998 or (iii) the Exchange Offer has been completed and
in the opinion of counsel for the Initial Purchasers a Registration Statement
must be filed and a Prospectus must be delivered by the Initial Purchasers in
connection with any offering or sale of Registrable Securities, the Company
shall use its best efforts to cause to be filed as soon as practicable after
such determination, date or notice of such opinion of counsel is given to the
Company, as the case may be, a Shelf Registration Statement providing for the
sale by the Holders of all of the Registrable Securities and to have such Shelf
Registration Statement declared effective by the SEC. In the event the Company
is required to file a Shelf Registration Statement solely as a result of the
matters referred to in clause (iii) of the preceding sentence, the Company shall
use its best efforts to file and have declared effective by the SEC both an
Exchange Offer Registration Statement pursuant to Section 2(a) with respect to
all Registrable Securities and a Shelf Registration Statement (which may be a
combined Registration Statement with the Exchange Offer Registration Statement)
with respect to offers and sales of Registrable Securities held by the Initial
Purchasers after completion of the Exchange Offer. The Company agrees to use its
best efforts to keep the Shelf Registration Statement continuously effective
until two years after the Closing Date or such shorter period that will
terminate when all of the Registrable Securities covered by the Shelf
Registration Statement have been sold pursuant to the Shelf Registration
Statement. The Company further agrees to supplement or amend the Shelf
Registration Statement if required by the rules, regulations or instructions
applicable to the registration form used by the Company for such Shelf
Registration Statement or by the 1933 Act or by any other rules and regulations
thereunder for shelf registration or if reasonably requested by a Holder with
respect to information relating to such Holder, and to use its best efforts to
cause any such amendment to become effective and such Shelf Registration
Statement to become usable as soon as thereafter
<PAGE> 8
7
practicable. The Company agrees to furnish to the Holders of Registrable
Securities copies of any such supplement or amendment promptly after its being
used or filed with the SEC.
(c) The Company shall pay all Registration Expenses in
connection with the registration pursuant to Section 2(a) or Section 2(b). Each
Holder shall pay all underwriting discounts and commissions and transfer taxes,
if any, relating to the sale or disposition of such Holder's Registrable
Securities pursuant to the Shelf Registration Statement.
(d) An Exchange Offer Registration Statement pursuant to
Section 2(a) hereof or a Shelf Registration Statement pursuant to Section 2(b)
hereof will not be deemed to have become effective unless it has been declared
effective by the SEC; provided, however, that, if, after it has been declared
effective, the offering of Registrable Securities pursuant to a Shelf
Registration Statement is interfered with by any stop order, injunction or other
order or requirement of the SEC or any other governmental agency or court, such
Registration Statement will be deemed not to have become effective during the
period of such interference until the offering of Registrable Securities
pursuant to such Registration Statement may legally resume. As provided for in
the Indenture, in the event the Exchange Offer is not consummated and the Shelf
Registration Statement is not declared effective on or prior to August 3, 1998,
the annual interest rate on the Securities (and the Exchange Securities) will
increase by 0.5% until the Exchange Offer is consummated or the Shelf
Registration Statement is declared effective.
(e) Without limiting the remedies available to the Initial
Purchasers and the Holders, the Company acknowledges that any failure by the
Company to comply with its obligations under Section 2(a) and Section 2(b)
hereof may result in material irreparable injury to the Initial Purchasers or
the Holders for which there is no adequate remedy at law, that it will not be
possible to measure damages for such injuries precisely and that, in the event
of any such failure, the Initial Purchasers or any Holder may obtain such relief
as may be required to specifically enforce the Company's obligations under
Section 2(a) and Section 2(b) hereof.
3. Registration Procedures.
In connection with the obligations of the Company with respect
to the Registration Statements pursuant to Section 2(a) and Section 2(b) hereof,
the Company shall as expeditiously as possible:
(a) prepare and file with the SEC a Registration Statement on
the appropriate form under the 1933 Act, which form (x) shall be
selected by the Company and (y) shall, in the case of a Shelf
Registration, be available for the sale of the Registrable Securities
by the selling Holders thereof and (z) shall comply as to form in
<PAGE> 9
8
all material respects with the requirements of the applicable form and
include all financial statements required by the SEC to be filed
therewith, and use its best efforts to cause such Registration
Statement to become effective and remain effective in accordance with
Section 2 hereof;
(b) prepare and file with the SEC such amendments and
post-effective amendments to each Registration Statement as may be
necessary to keep such Registration Statement effective for the
applicable period and cause each Prospectus to be supplemented by any
required prospectus supplement and, as so supplemented, to be filed
pursuant to Rule 424 under the 1933 Act; to keep each Prospectus
current during the period described under Section 4(3) and Rule 174
under the 1933 Act that is applicable to transactions by brokers or
dealers with respect to the Registrable Securities or Exchange
Securities;
(c) in the case of a Shelf Registration, furnish to each
Holder of Registrable Securities, to counsel for the Initial
Purchasers, to counsel for the Holders and to each Underwriter of an
Underwritten Offering of Registrable Securities, if any, without
charge, as many copies of each Prospectus, including each preliminary
Prospectus, and any amendment or supplement thereto and such other
documents as such Holder or Underwriter may reasonably request, in
order to facilitate the public sale or other disposition of the
Registrable Securities; and the Company consents to the use of such
Prospectus and any amendment or supplement thereto in accordance with
applicable law by each of the selling Holders of Registrable Securities
and any such Underwriters in connection with the offering and sale of
the Registrable Securities covered by and in the manner described in
such Prospectus or any amendment or supplement thereto in accordance
with applicable law;
(d) use its best efforts to register or qualify the
Registrable Securities under all applicable state securities or "blue
sky" laws of such jurisdictions as any Holder of Registrable Securities
covered by a Registration Statement shall reasonably request in writing
by the time the applicable Registration Statement is declared effective
by the SEC, to cooperate with such Holders in connection with any
filings required to be made with the National Association of Securities
Dealers, Inc. and do any and all other acts and things which may be
reasonably necessary or advisable to enable such Holder to consummate
the disposition in each such jurisdiction of such Registrable
Securities owned by such Holder; provided, however, that the Company
shall not be required to (i) qualify as a foreign corporation or as a
dealer in securities in any jurisdiction where it would not otherwise
be required to qualify but for this Section 3(d), (ii) file any general
consent to service of process or (iii) subject itself to taxation in
any such jurisdiction if it is not so subject;
<PAGE> 10
9
(e) in the case of a Shelf Registration, notify each Holder of
Registrable Securities, counsel for the Holders and counsel for the
Initial Purchasers promptly and, if requested by any such Holder or
counsel, confirm such advice in writing (i) when a Registration
Statement has become effective and when any post-effective amendment
thereto has been filed and becomes effective, (ii) of any request by
the SEC or any state securities authority for amendments and
supplements to a Registration Statement and Prospectus or for
additional information after the Registration Statement has become
effective, (iii) of the issuance by the SEC or any state securities
authority of any stop order suspending the effectiveness of a
Registration Statement or the initiation of any proceedings for that
purpose, (iv) if, between the effective date of a Registration
Statement and the closing of any sale of Registrable Securities covered
thereby, the representations and warranties of the Company contained in
any underwriting agreement, securities sales agreement or other similar
agreement, if any, relating to the offering cease to be true and
correct in all material respects or if the Company receives any
notification with respect to the suspension of the qualification of the
Registrable Securities for sale in any jurisdiction or the initiation
of any proceeding for such purpose, (v) of the happening of any event
during the period a Shelf Registration Statement is effective which
makes any statement made in such Registration Statement or the related
Prospectus untrue in any material respect or which requires the making
of any changes in such Registration Statement or Prospectus in order to
make the statements therein not misleading and (vi) of any
determination by the Company that a post-effective amendment to a
Registration Statement would be appropriate;
(f) make every reasonable effort to obtain the withdrawal of
any order suspending the effectiveness of a Registration Statement at
the earliest possible moment and provide immediate notice to each
Holder of the withdrawal of any such order;
(g) in the case of a Shelf Registration, furnish to each
Holder of Registrable Securities, without charge, at least one
conformed copy of each Registration Statement and any post-effective
amendment thereto (without documents incorporated therein by reference
or exhibits thereto, unless requested);
(h) in the case of a Shelf Registration, cooperate with the
selling Holders of Registrable Securities to facilitate the timely
preparation and delivery of certificates representing Registrable
Securities to be sold and not bearing any restrictive legends and
enable such Registrable Securities to be in such denominations
(consistent with the provisions of the Indenture) and registered in
such names as the selling Holders may reasonably request at least one
business day prior to the closing of any sale of Registrable
Securities;
<PAGE> 11
10
(i) in the case of a Shelf Registration, upon the occurrence
of any event contemplated by Section 3(e)(v) hereof, use its best
efforts to prepare and file with the SEC a supplement or post-effective
amendment to a Registration Statement or the related Prospectus or any
document incorporated therein by reference or file any other required
document so that, as thereafter delivered to the purchasers of the
Registrable Securities, such Prospectus will not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements therein, in light of the circumstances under
which they were made, not misleading. The Company agrees to notify the
Holders to suspend use of the Prospectus as promptly as practicable
after the occurrence of such an event, and the Holders hereby agree to
suspend use of the Prospectus until the Company has amended or
supplemented the Prospectus to correct such misstatement or omission;
(j) a reasonable time prior to the filing of any Registration
Statement, any Prospectus, any amendment to a Registration Statement or
amendment or supplement to a Prospectus or any document which is to be
incorporated by reference into a Registration Statement or a Prospectus
after initial filing of a Registration Statement, provide copies of
such document to the Initial Purchasers and their counsel (and, in the
case of a Shelf Registration Statement, the Holders and their counsel)
and make such of the representatives of the Company as shall be
reasonably requested by the Initial Purchasers or their counsel (and,
in the case of a Shelf Registration Statement, the Holders or their
counsel) available for discussion of such document, and shall not at
any time file or make any amendment to the Registration Statement, any
Prospectus or any amendment of or supplement to a Registration
Statement or a Prospectus or any document which is to be incorporated
by reference into a Registration Statement or a Prospectus, of which
the Initial Purchasers and their counsel (and, in the case of a Shelf
Registration Statement, the Holders and their counsel) shall not have
previously been advised and furnished a copy or to which the Initial
Purchasers or their counsel (and, in the case of a Shelf Registration
Statement, the Holders or their counsel) shall object;
(k) obtain a CUSIP number for all Exchange Securities or
Registrable Securities, as the case may be, not later than the
effective date of a Registration Statement;
(l) cause the Indenture to be qualified under the Trust
Indenture Act of 1939, as amended (the "TIA"), in connection with the
registration of the Exchange Securities or Registrable Securities, as
the case may be, cooperate with the Trustee and the Holders to effect
such changes to the Indenture as may be required for the Indenture to
be so qualified in accordance with the terms of the TIA and execute,
and use its best efforts to cause the Trustee to execute, all documents
as may be required to effect such
<PAGE> 12
11
changes and all other forms and documents required to be filed with the
SEC to enable the Indenture to be so qualified in a timely manner;
(m) in the case of a Shelf Registration, upon the execution of
customary confidentiality agreements reasonably satisfactory to the
Company, make available for inspection by a representative of the
Holders of the Registrable Securities, any Underwriter participating in
any disposition pursuant to such Shelf Registration Statement, and
attorneys and accountants designated by the Holders, at reasonable
times and in a reasonable manner, all financial and other records,
pertinent documents and properties of the Company, and cause the
respective officers, directors and employees of the Company to supply
all information reasonably requested by any such representative,
Underwriter, attorney or accountant in connection with a Shelf
Registration Statement;
(n) in the case of a Shelf Registration, use its best efforts
to cause all Registrable Securities to be listed on any securities
exchange or any automated quotation system on which similar securities
issued by the Company are then listed if requested by the Majority
Holders, to the extent such Registrable Securities satisfy applicable
listing requirements;
(o) use its best efforts to cause the Exchange Securities or
Registrable Securities, as the case may be, to be rated by two
nationally recognized statistical rating organizations (as such term is
defined in Rule 436(g)(2) under the 1933 Act);
(p) if reasonably requested by any Holder of Registrable
Securities covered by a Registration Statement, (i) promptly
incorporate in a Prospectus supplement or post-effective amendment such
information with respect to such Holder as such Holder reasonably
requests to be included therein and (ii) make all required filings of
such Prospectus supplement or such post-effective amendment as soon as
the Company has received notification of the matters to be incorporated
in such filing; and
(q) in the case of a Shelf Registration, enter into such
customary agreements and take all such other actions in connection
therewith (including those requested by the Holders of a majority of
the Registrable Securities being sold) in order to expedite or
facilitate the disposition of such Registrable Securities including,
but not limited to, an Underwritten Offering and in such connection,
(i) to the extent possible, make such representations and warranties to
the Holders and any Underwriters of such Registrable Securities with
respect to the business of the Company and its subsidiaries, the
Registration Statement, Prospectus and documents incorporated by
reference or deemed incorporated by reference, if any, in each case, in
form, substance and scope as are customarily made by issuers to
underwriters in underwritten offerings and confirm the
<PAGE> 13
12
same if and when requested, (ii) obtain opinions of counsel to the
Company (which counsel and opinions, in form, scope and substance,
shall be reasonably satisfactory to the Holders and such Underwriters
and their respective counsel) addressed to each selling Holder and
Underwriter of Registrable Securities, covering the matters customarily
covered in opinions requested in underwritten offerings, (iii) obtain
"cold comfort" letters from the independent certified public
accountants of the Company (and, if necessary, any other certified
public accountant of any subsidiary of the Company, or of any business
acquired by the Company for which financial statements and financial
data are or are required to be included in the Registration Statement)
addressed to each selling Holder and Underwriter of Registrable
Securities, such letters to be in customary form and covering matters
of the type customarily covered in "cold comfort" letters in connection
with underwritten offerings, and (iv) deliver such documents and
certificates as may be reasonably requested by the Holders of a
majority in principal amount at maturity of the Registrable Securities
being sold or the Underwriters, and which are customarily delivered in
underwritten offerings, to evidence the continued validity of the
representations and warranties of the Company made pursuant to clause
(i) above and to evidence compliance with any customary conditions
contained in an underwriting agreement.
In the case of a Shelf Registration Statement, the Company may
require each Holder of Registrable Securities to furnish to the Company such
information regarding the Holder and the proposed distribution by such Holder of
such Registrable Securities as the Company may from time to time reasonably
request in writing.
In the case of a Shelf Registration Statement, each Holder
agrees that, upon receipt of any notice from the Company of the happening of any
event of the kind described in Section 3(e)(v) hereof, such Holder will
forthwith discontinue disposition of Registrable Securities pursuant to a
Registration Statement until such Holder's receipt of the copies of the
supplemented or amended Prospectus contemplated by Section 3(i) hereof, and, if
so directed by the Company, such Holder will deliver to the Company (at its
expense) all copies in its possession, other than permanent file copies then in
such Holder's possession, of the Prospectus covering such Registrable Securities
current at the time of receipt of such notice. If the Company shall give any
such notice to suspend the disposition of Registrable Securities pursuant to a
Registration Statement, the Company shall extend the period during which the
Registration Statement shall be maintained effective pursuant to this Agreement
by the number of days during the period from and including the date of the
giving of such notice to and including the date when the Holders shall have
received copies of the supplemented or amended Prospectus necessary to resume
such dispositions. The Company may give any such notice only twice during any
365-day period and any such suspensions may not exceed 60 days for each
suspension and there may not be more than two suspensions in effect during any
365-day period.
<PAGE> 14
13
The Holders of Registrable Securities covered by a Shelf
Registration Statement who desire to do so may sell such Registrable Securities
in an Underwritten Offering. In any such Underwritten Offering, the investment
banker or investment bankers and manager or managers (the "Underwriters") that
will administer the offering will be selected by the Majority Holders of the
Registrable Securities included in such offering.
4. Participation of Broker-Dealers in Exchange Offer.
(a) The Company understands that the Staff of the SEC has
taken the position that any broker-dealer that receives Exchange Securities for
its own account in the Exchange Offer in exchange for Securities that were
acquired by such broker-dealer as a result of market-making or other trading
activities (a "Participating Broker-Dealer"), may be deemed to be an
"underwriter" within the meaning of the 1933 Act and must deliver a prospectus
meeting the requirements of the 1933 Act in connection with any resale of such
Exchange Securities.
The Company understands that it is the Staff's position that
if the Prospectus contained in the Exchange Offer Registration Statement
includes a plan of distribution containing a statement to the above effect and
the means by which Participating Broker-Dealers may resell the Exchange
Securities, without naming the Participating Broker-Dealers or specifying the
amount of Exchange Securities owned by them, such Prospectus may be delivered by
Participating Broker-Dealers to satisfy their prospectus delivery obligation
under the 1933 Act in connection with resales of Exchange Securities for their
own accounts, so long as the Prospectus otherwise meets the requirements of the
1933 Act.
(b) In light of the above, notwithstanding the other
provisions of this Agreement, the Company agrees that the provisions of this
Agreement as they relate to a Shelf Registration shall also apply to an Exchange
Offer Registration to the extent, and with such reasonable modifications thereto
as may be, reasonably requested by the Initial Purchasers or by one or more
Participating Broker-Dealers, in each case as provided in clause (ii) below, in
order to expedite or facilitate the disposition of any Exchange Securities by
Participating Broker-Dealers consistent with the positions of the Staff recited
in Section 4(a) above; provided that:
(i) the Company shall not be required to amend or supplement
the Prospectus contained in the Exchange Offer Registration Statement,
as would otherwise be contemplated by Section 3(i), for a period
exceeding 180 days after the last Exchange Date (as such period may be
extended pursuant to the penultimate paragraph of Section 3 of this
Agreement) and Participating Broker-Dealers shall not be authorized by
the Company to deliver and shall not deliver such Prospectus after such
period in connection with the resales contemplated by this Section 4;
and
<PAGE> 15
14
(ii) the application of the Shelf Registration procedures set
forth in Section 3 of this Agreement to an Exchange Offer Registration,
to the extent not required by the positions of the Staff of the SEC or
the 1933 Act and the rules and regulations thereunder, will be in
conformity with the reasonable request to the Company by the Initial
Purchasers or with the reasonable request in writing to the Company by
one or more broker-dealers who certify to the Initial Purchasers and
the Company in writing that they anticipate that they will be
Participating Broker-Dealers; and provided further that, in connection
with such application of the Shelf Registration procedures set forth in
Section 3 to an Exchange Offer Registration, the Company shall be
obligated (x) to deal only with one entity representing the
Participating Broker-Dealers, which shall be Morgan Stanley & Co.
Incorporated unless it elects not to act as such representative, (y) to
pay the fees and expenses of only one counsel representing the
Participating Broker-Dealers, which shall be counsel to the Initial
Purchasers unless such counsel elects not to so act and (z) to cause to
be delivered only one, if any, "cold comfort" letter with respect to
the Prospectus in the form existing on the last Exchange Date and with
respect to each subsequent amendment or supplement, if any, effected
during the period specified in clause (i) above.
(c) The Initial Purchasers shall have no liability to the
Company or any Holder with respect to any request that it may make pursuant to
Section 4(b) above.
5. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless the
Initial Purchasers, each Holder and each person, if any, who controls any
Initial Purchaser or any Holder within the meaning of either Section 15 of the
1933 Act or Section 20 of the 1934 Act, or is under common control with, or is
controlled by, any Initial Purchaser or any Holder, from and against all losses,
claims, damages and liabilities (including, without limitation, any legal or
other expenses reasonably incurred by any Initial Purchaser, any Holder or any
such controlling or affiliated person in connection with defending or
investigating any such action or claim) caused by any untrue statement or
alleged untrue statement of a material fact contained in any Registration
Statement (or any amendment thereto) pursuant to which Exchange Securities or
Registrable Securities were registered under the 1933 Act, including all
documents incorporated therein by reference, or caused by any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, or caused by any
untrue statement or alleged untrue statement of a material fact contained in any
Prospectus (as amended or supplemented if the Company shall have furnished any
amendments or supplements thereto), or caused by any omission or alleged
omission to state therein a material fact necessary to make the statements
therein in light of the circumstances under which they were made not misleading,
except insofar as such losses, claims, damages or liabilities are caused by any
such untrue statement or omission or alleged
<PAGE> 16
15
untrue statement or omission based upon information relating to the Initial
Purchasers or any Holder furnished to the Company in writing by the Initial
Purchasers or any selling Holder expressly for use therein. In connection with
any Underwritten Offering permitted by Section 3, the Company will also
indemnify the Underwriters, if any, selling brokers, dealers and similar
securities industry professionals participating in the distribution, their
officers and directors and each Person who controls such Persons (within the
meaning of the 1933 Act and the 1934 Act) to the same extent as provided above
with respect to the indemnification of the Holders, if requested in connection
with any Registration Statement.
(b) Each Holder agrees, severally and not jointly, to
indemnify and hold harmless the Company, the Initial Purchasers and the other
selling Holders, and each of their respective directors, officers who sign the
Registration Statement and each Person, if any, who controls the Company, any
Initial Purchaser and any other selling Holder within the meaning of either
Section 15 of the 1933 Act or Section 20 of the 1934 Act to the same extent as
the foregoing indemnity from the Company to the Initial Purchasers and the
Holders, but only with reference to information relating to such Holder
furnished to the Company in writing by such Holder expressly for use in any
Registration Statement (or any amendment thereto) or any Prospectus (or any
amendment or supplement thereto).
(c) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of which
indemnity may be sought pursuant to either paragraph (a) or paragraph (b) above,
such person (the "indemnified party") shall promptly notify the person against
whom such indemnity may be sought (the "indemnifying party") in writing and the
indemnifying party, upon request of the indemnified party, shall retain counsel
reasonably satisfactory to the indemnified party to represent the indemnified
party and any others the indemnifying party may designate in such proceeding and
shall pay the fees and disbursements of such counsel related to such proceeding.
In any such proceeding, any indemnified party shall have the right to retain its
own counsel, but the fees and expenses of such counsel shall be at the expense
of such indemnified party unless (i) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any impleaded parties) include
both the indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. It is understood that the indemnifying party
shall not, in connection with any proceeding or related proceedings in the same
jurisdiction, be liable for (a) the fees and expenses of more than one separate
firm (in addition to any local counsel) for the Initial Purchasers and all
persons, if any, who control any Initial Purchaser within the meaning of either
Section 15 of the 1933 Act or Section 20 of the 1934 Act, (b) the fees and
expenses of more than one separate firm (in addition to any local counsel) for
the Company, its directors, its officers who sign the Registration Statement and
each person, if any, who controls the Company within the meaning of either such
Section and (c) the fees and expenses of more than
<PAGE> 17
16
one separate firm (in addition to any local counsel) for all Holders and all
persons, if any, who control any Holders within the meaning of either such
Section, and that all such fees and expenses shall be reimbursed as they are
incurred. In such case involving the Initial Purchasers and persons who control
any Initial Purchaser, such firm shall be designated in writing by Morgan
Stanley & Co. Incorporated. In such case involving the Holders and such persons
who control any Holders, such firm shall be designated in writing by the
Majority Holders. In all other cases, such firm shall be designated by the
Company. The indemnifying party shall not be liable for any settlement of any
proceeding effected without its written consent but, if settled with such
consent or if there be a final judgment for the plaintiff, the indemnifying
party agrees to indemnify the indemnified party from and against any loss or
liability by reason of such settlement or judgment. Notwithstanding the
foregoing sentence, if at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for fees and expenses of
counsel as contemplated by the second and third sentences of this paragraph, the
indemnifying party agrees that it shall be liable for any settlement of any
proceeding effected without its written consent if (i) such settlement is
entered into more than 60 days after receipt by such indemnifying party of the
aforesaid request and (ii) such indemnifying party shall not have reimbursed the
indemnified party for such fees and expenses of counsel in accordance with such
request prior to the date of such settlement. No indemnifying party shall,
without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened proceeding in respect of which such
indemnified party is or could have been a party and indemnity could have been
sought hereunder by such indemnified party, unless such settlement includes an
unconditional release of such indemnified party from all liability on claims
that are the subject matter of such proceeding.
(d) If the indemnification provided for in paragraph (a) or
paragraph (b) of this Section 5 is unavailable to an indemnified party or
insufficient in respect of any losses, claims, damages or liabilities, then each
indemnifying party under such paragraph, in lieu of indemnifying such
indemnified party thereunder, shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages or
liabilities in such proportion as is appropriate to reflect the relative fault
of the indemnifying party or parties on the one hand and of the indemnified
party or parties on the other hand in connection with the statements or
omissions that resulted in such losses, claims, damages or liabilities, as well
as any other relevant equitable considerations. The relative fault of the
Company and the Holders shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or by the Holders and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Holders' respective obligations to contribute
pursuant to this Section 5(d) are several in proportion to the respective amount
of Registrable Securities of such Holder that were registered pursuant to a
Registration Statement.
<PAGE> 18
17
(e) The Company and each Holder agree that it would not be
just or equitable if contribution pursuant to this Section 5 were determined by
pro rata allocation or by any other method of allocation that does not take
account of the equitable considerations referred to in paragraph (d) above. The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages and liabilities referred to in paragraph (d) above shall be
deemed to include, subject to the limitations set forth above, any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 5, no Holder shall be required to indemnify or
contribute any amount in excess of the amount by which the total price at which
Registrable Securities were sold by such Holder exceeds the amount of any
damages that such Holder has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or alleged omission. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the 1933 Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The remedies provided for in this
Section 5 are not exclusive and shall not limit any rights or remedies which may
otherwise be available to any indemnified party at law or in equity.
The indemnity and contribution provisions contained in this
Section 5 shall remain operative and in full force and effect regardless of (i)
any termination of this Agreement, (ii) any investigation made by or on behalf
of the Initial Purchasers, any Holder or any person controlling any Initial
Purchaser or any Holder, or by or on behalf of the Company, its officers or
directors or any person controlling the Company, (iii) acceptance of any of the
Exchange Securities and (iv) any sale of Registrable Securities pursuant to a
Shelf Registration Statement.
6. Miscellaneous.
(a) No Inconsistent Agreements. The Company has not entered
into, and on or after the date of this Agreement will not enter into, any
agreement which is inconsistent with the rights granted to the Holders of
Registrable Securities in this Agreement or otherwise conflicts with the
provisions hereof. The rights granted to the Holders hereunder do not in any way
conflict with and are not inconsistent with the rights granted to the holders of
the Company's other issued and outstanding securities under any such agreements.
(b) Amendments and Waivers. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given unless the Company has obtained the written consent of Holders
of at least a majority in aggregate principal amount at maturity of the
outstanding Registrable Securities affected by such amendment, modification,
supplement, waiver or consent; provided, however, that no amendment,
modification, supplement, waiver or consents to any departure from the
provisions of Section 5 hereof shall
<PAGE> 19
18
be effective as against any Holder of Registrable Securities unless consented to
in writing by such Holder.
(c) Notices. All notices and other communications provided for
or permitted hereunder shall be made in writing by hand-delivery, registered
first-class mail, telex, telecopier, or any courier guaranteeing overnight
delivery (i) if to a Holder, at the most current address given by such Holder to
the Company by means of a notice given in accordance with the provisions of this
Section 6(c), which address initially is, with respect to the Initial
Purchasers, the address set forth in the Purchase Agreement; and (ii) if to the
Company, initially at the Company's address set forth in the Purchase Agreement
and thereafter at such other address, notice of which is given in accordance
with the provisions of this Section 6(c).
All such notices and communications shall be deemed to have
been duly given: at the time delivered by hand, if personally delivered; five
business days after being deposited in the mail, postage prepaid, if mailed;
when answered back, if telexed; when receipt is acknowledged, if telecopied; and
on the next business day if timely delivered to an air courier guaranteeing
overnight delivery.
Copies of all such notices, demands, or other communications
shall be concurrently delivered by the person giving the same to the Trustee, at
the address specified in the Indenture.
(d) Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon the successors, assigns and transferees of each
of the parties, including, without limitation and without the need for an
express assignment, subsequent Holders; provided that nothing herein shall be
deemed to permit any assignment, transfer or other disposition of Registrable
Securities in violation of the terms of the Purchase Agreement. If any
transferee of any Holder shall acquire Registrable Securities, in any manner,
whether by operation of law or otherwise, such Registrable Securities shall be
held subject to all of the terms of this Agreement, and by taking and holding
such Registrable Securities such person shall be conclusively deemed to have
agreed to be bound by and to perform all of the terms and provisions of this
Agreement and such person shall be entitled to receive the benefits hereof. The
Initial Purchasers (in their capacity as Initial Purchasers) shall have no
liability or obligation to the Company with respect to any failure by a Holder
to comply with, or any breach by any Holder of, any of the obligations of such
Holder under this Agreement.
(e) Third Party Beneficiary. The Holders shall be third party
beneficiaries to the agreements made hereunder between the Company, on the one
hand, and the Initial Purchasers, on the other hand, and any Holder shall have
the right to enforce such agreements
<PAGE> 20
19
directly to the extent it deems such enforcement necessary or advisable to
protect its rights or the rights of Holders hereunder.
(f) Counterparts. This Agreement may be executed in any number
of counterparts and by the parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(g) Headings. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
(h) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York.
(i) Severability. In the event that any one or more of the
provisions contained herein, or the application thereof in any circumstance, is
held invalid, illegal or unenforceable, the validity, legality and
enforceability of any such provision in every other respect and of the remaining
provisions contained herein shall not be affected or impaired thereby.
(j) Miscellaneous. The Company agrees, for the sole benefit of
the Initial Purchasers;
(i) prior to the consummation of the Exchange Offer or the
effectiveness of a Shelf Registration Statement if, in the reasonable
judgment of any Initial Purchaser, such Initial Purchaser or any of its
affiliates (as such term is defined in the rules and regulations under
the 1933 Act) is required to deliver an offering memorandum in
connection with sales of, or market-making activities with respect to,
the Securities or the Exchange Securities, (A) to periodically amend or
supplement the Final Memorandum so that the information contained in
the Final Memorandum complies with the requirements of Rule 144A of the
1933 Act, (B) to amend or supplement the Final Memorandum when
necessary to reflect any material changes in the information provided
therein so that the Final Memorandum will not contain any untrue
statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in light of the
circumstances existing as of the date the Final Memorandum is so
delivered, not misleading and (C) to provide such Initial Purchaser
with copies of each such amended or supplemental Final Memorandum, as
such Initial Purchaser may reasonably request;
(ii) following the consummation of the Exchange Offer or the
effectiveness of a Shelf Registration Statement and for so long as the
Securities or, the Exchange
<PAGE> 21
20
Securities are outstanding if, in the reasonable judgement of any
Initial Purchaser, such Initial Purchaser or any of its affiliates (as
such term is defined in the rules and regulations under the 1933 Act)
is required to deliver a prospectus in connection with sales of, or
market-making activities with respect to, such securities, (A) to
periodically amend the applicable registration statement so that the
information contained therein complies with the requirements of Section
10(a) of the 1933 Act, (B) if requested by such Initial Purchaser,
within 45 days following the end of the Company's most recent fiscal
quarter, file a supplement to the prospectus included in the applicable
registration statement which sets forth the financial results of the
Company for the previous quarter, (C) to amend the applicable
registration statement or supplement the related prospectus or the
documents incorporated therein when necessary to reflect any material
changes in the information provided therein so that the registration
statement and the prospectus will not contain any untrue statement of a
material fact or omit to state any material fact necessary in order to
make the statements therein, in light of the circumstances existing as
of the date the prospectus is so delivered, not misleading and (D) to
provide such Initial Purchaser with copies of each such amendment or
supplement as such Initial Purchaser may reasonably request;
(iii) notwithstanding clauses (i) and (ii) above, (A) prior to
amending the Final Memorandum or to filing any post-effective amendment
to any registration statement or to supplementing any related
prospectus, to furnish to the Initial Purchasers and their counsel,
copies of all such documents proposed to be amended, filed or
supplemented, and (B) it will not issue any amendment to the Final
Memorandum, any post-effective amendment to a registration statement or
any supplement to a prospectus to which the Initial Purchasers or their
counsel shall object;
(iv) it shall notify the Initial Purchasers and their counsel
and (if requested by any such person) confirm such advice in writing,
(A) when any amendment to the Final Memorandum has been issued, when
any prospectus supplement or amendment or post-effective amendment has
been filed, and, with respect to any post-effective amendment, when the
same has become effective, (B) of any request by the SEC for any
post-effective amendment or supplement to a registration statement, any
supplement or amendment to a prospectus or for additional information,
(C) the issuance by the SEC of any stop order suspending the
effectiveness of a registration statement or the initiation of any
proceedings for that purpose, (D) of the receipt by the Company of any
notification with respect to the suspension of the qualification of the
Securities or the Exchange Securities for sale in any jurisdiction or
the initiation or threatening of any proceedings for such purpose and
(E) of the happening of any event which makes any statement made in the
Final Memorandum, a registration statement, a prospectus or any
amendment or supplement thereto untrue or which requires the making of
any change in
<PAGE> 22
21
the Final Memorandum, a registration statement, a prospectus or any
amendment or supplement thereto, in order to make the statements
therein not misleading;
(v) it consents to the use of the Final Memorandum and any
prospectus referred to in this paragraph (j) or any amendment or
supplement thereto, by the Initial Purchasers in connection with the
offering and sale of the Securities or Exchange Securities, as the case
may be;
(vi) it will comply with the provisions of this paragraph (j)
at its own expense and will reimburse the Initial Purchasers for its
expenses associated with this paragraph (j) (including fees of
counsel); and
(vii) and hereby expressly acknowledges that the
indemnification and contribution provisions of Section 8 of the
Purchase Agreement shall be specifically applicable and relate to each
offering memorandum, registration statement, prospectus, amendment or
supplement referred to in this paragraph (j).
<PAGE> 23
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first written above.
ALLEGIANCE TELECOM, INC.
By /s/ ROYCE J. HOLLAND
-----------------------
Name: Royce J. Holland
Title: Chairman and
Chief Executive
Officer
Agreed, as of the first date written above
Morgan Stanley & Co.
Incorporated
Salomon Brothers Inc
Bear, Stearns & Co. Inc.
Donaldson, Lufkin & Jenrette
Securities Corporation
By Morgan Stanley & Co.
Incorporated
By /s/ JAMES D. ALLEN
-----------------------
Name: James D. Allen
Title: Vice President
<PAGE> 1
EXHIBIT 5.1
[Kirkland & Ellis Letterhead]
To Call Writer Direct:
312 861-2000
May 6, 1998
Allegiance Telecom, Inc.
1950 Stemmons Freeway
Suite 3026
Dallas, Texas 75207
Re: Allegiance Telecom, Inc.
Series B 11 3/4% Senior Discount Notes due 2008
Ladies and Gentlemen:
We are acting as special counsel to Allegiance Telecom, Inc., a
Delaware corporation (the "Company"), in connection with the proposed
registration by the Company of up to $445,000,000 in aggregate principal amount
of the Company's Series B 11 3/4% Senior Discount Notes due 2008 (the "Exchange
Notes"), pursuant to a Registration Statement on Form S-4 filed with the
Securities and Exchange Commission (the "Commission") on March 31, 1998 under
the Securities Act of 1933, as amended (the "Securities Act") (such Registration
Statement, as amended or supplemented, is hereinafter referred to as the
"Registration Statement"), for the purpose of effecting an exchange offer (the
"Exchange Offer") for the Company's 11 3/4% Senior Discount Notes due 2008 (the
"Old Notes"). The Exchange Notes are to be issued pursuant to the Indenture (the
"Indenture"), dated February 3, 1998, by and among the Company and The Bank of
New York (the "Trustee"), in exchange for and in replacement of the Company's
outstanding Old Notes, of which $445,000,000 in aggregate principal amount is
outstanding.
In that connection, we have examined originals, or copies certified or
otherwise identified to our satisfaction, of such documents, corporate records
and other instruments as we have deemed necessary for the purposes of this
opinion, including (i) the corporate and organizational documents of the
Company, (ii) minutes and records of the corporate proceedings of the Company
with respect to the issuance of the Exchange Notes, (iii) the Registration
Statement and exhibits thereto and (iv) the Registration Rights Agreement, dated
February 3, 1998, among the Company and the initial purchasers named therein.
<PAGE> 2
Allegiance Telecom, Inc.
May 6, 1998
Page 2
For purposes of this opinion, we have assumed the authenticity of all
documents submitted to us as originals, the conformity to the originals of all
documents submitted to us as copies and the authenticity of the originals of all
documents submitted to us as copies. We have also assumed the genuineness of the
signatures of persons signing all documents in connection with which this
opinion is rendered, the authority of such persons signing on behalf of the
parties thereto other than the Company, and the due authorization, execution and
delivery of all documents by the parties thereto other than the Company. As to
any facts material to the opinions expressed herein which we have not
independently established or verified, we have relied upon statements and
representations of officers and other representatives of the Company and others.
Based upon and subject to the foregoing qualifications, assumptions and
limitations and the further limitations set forth below, we are of the opinion
that:
(1) The Company is a corporation existing and in good standing under
the General Corporation Law of the State of Delaware.
(2) The sale and issuance of the Exchange Notes has been validly
authorized by the Company.
(3) When, as and if (i) the Registration Statement becomes effective
pursuant to the provisions of the Securities Act, (ii) the Indenture has been
qualified pursuant to the provisions of the Trust Indenture Act of 1939, as
amended, (iii) the Old Notes have been validly tendered to the Company, (iv) the
Exchange Notes have been issued in the form and containing the terms described
in the Registration Statement, the Indenture, the resolutions of the Company's
Board of Directors (or authorized committee thereof) authorizing the foregoing
and any legally required consents, approvals, authorizations and other order of
the Commission and any other regulatory authorities to be obtained and (v) the
Exchange Notes have been authenticated by the Trustee, the Exchange Notes when
issued pursuant to the Exchange Offer will be legally issued, fully paid and
nonassessable and will constitute valid and binding obligations of the Company.
Our opinions expressed above are subject to the qualifications that we
express no opinion as to the applicability of, compliance with, or effect of (i)
any bankruptcy, insolvency, reorganization, fraudulent transfer, fraudulent
conveyance, moratorium or other similar law affecting the enforcement of
creditors' rights generally, (ii) general principles of equity (regardless of
whether enforcement is considered in a proceeding in equity or at law), (iii)
public policy considerations
<PAGE> 3
Allegiance Telecom, Inc.
May 6, 1998
Page 3
which may limit the rights of parties to obtain certain remedies and (iv) any
laws except the laws of the State of New York and the General Corporation Law of
the State of Delaware. We advise you that issues addressed by this letter may be
governed in whole or in part by other laws, but we express no opinion as to
whether any relevant difference exists between the laws upon which our opinions
are based and any other laws which may actually govern. For purposes of the
opinions in paragraph 1, we have relied exclusively upon recent certificates
issued by the Delaware Secretary of State, and such opinions are not intended to
provide any conclusion or assurance beyond that conveyed by such certificates.
We have assumed without investigation that there has been no relevant change or
development between the respective dates of such certificates and the date of
this letter.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement. We also consent to the reference to our firm under the
heading "Legal Matters" in the Registration Statement. In giving this consent,
we do not thereby admit that we are in the category of persons whose consent is
required under Section 7 of the Securities Act of the rules and regulations of
the Commission.
We do not find it necessary for the purposes of this opinion, and
accordingly we do not purport to cover herein, the application of the securities
or "Blue Sky" laws of the various states to the issuance of the Exchange Notes.
This opinion is limited to the specific issues addressed herein, and no
opinion may be inferred or implied beyond that expressly stated herein. We
assume no obligation to revise or supplement this opinion should the present
laws of the States of Delaware or New York be changed by legislative action,
judicial decision or otherwise.
This opinion is furnished to you in connection with the filing of the
Registration Statement, and is not to be used, circulated, quoted or otherwise
relied upon for any other purposes.
Yours very truly,
/s/ KIRKLAND & ELLIS
KIRKLAND & ELLIS
<PAGE> 1
EXHIBIT 10.5
EXECUTIVE PURCHASE AGREEMENT
THIS EXECUTIVE PURCHASE AGREEMENT (this "Agreement") is made
as of August 13, 1997, by and between Transcend Telecom, L.L.C., a Delaware
limited liability company (the "LLC"), Transcend Telecom, Inc., a Delaware
corporation (the "Company"), Royce J. Holland ("Executive"), and the Royce J.
Holland Family Limited Partnership (the "Partnership," and collectively with
Executive, the "Executive Purchasers"). Capitalized terms used but not
otherwise defined herein have the meanings ascribed to such terms in paragraph
7 hereof.
NOW, THEREFORE, in consideration of the mutual promises made
herein and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto, intending to be legally
bound, agree as follows:
1. PURCHASE AND SALE OF EXECUTIVE SECURITIES.
(a) Initial Capital Contribution and Issuance of
Executive Securities. Upon execution of this Agreement, (i) Executive shall
make a capital contribution to the LLC of one share of the Company's common
stock and cash in the amount of $36,921 (Executive's "Initial Capital
Contribution") in exchange for, and the LLC shall issue to Executive, 718,750
Class B Units having the rights, obligations, and preferences set forth with
respect thereto in the LLC Agreement, and (ii) the Partnership shall make a
capital contribution to the LLC in the amount of $36,921 (the Partnership's
"Initial Capital Contribution") in exchange for, and the LLC shall issue to the
Partnership, 718,750 Class B Units having the rights, obligations, and
preferences set forth with respect thereto in the LLC Agreement. Each of the
Executive Purchasers shall make such Executive Purchaser's Initial Capital
Contribution to the LLC by delivery to the LLC of a cashier's or certified
check, or wire transfer of immediately available funds to an account designated
by the LLC, in the aggregate amount equal to such Executive Purchaser's Initial
Capital Contribution. The aggregate amount of the Initial Capital
Contributions made with respect to each Class B Unit issued hereunder shall be
considered Basic Contributions made with respect to such Class B Unit.
(b) Representations and Warranties of Executive. In
connection with the Executive Purchasers' Initial Capital Contributions and the
issuance of the Executive Securities hereunder, each of the Executive
Purchasers represents and warrants (and Executive represents and warrants on
behalf of himself and each other Executive Purchaser) to each of the LLC and
the Company that:
(i) The Executive Securities to be acquired by
the Executive Purchasers pursuant to this Agreement shall be acquired
for the Executive Purchasers' own account and not with a view to, or
intention of, distribution thereof in violation of the Securities Act
or any applicable state securities laws, and the Executive Securities
shall not be disposed of in contravention of the Securities Act or any
applicable state securities laws.
<PAGE> 2
(ii) Executive will serve on the Management
Committee of the LLC and is a management employee of the Company, and
each of the Executive Purchasers is sophisticated in financial matters
and is able to evaluate the risks and benefits of the investment in
the Executive Securities.
(iii) Each of the Executive Purchasers is able to
bear the economic risk of his investment in the Executive Securities
for an indefinite period of time and is aware that transfer of the
Executive Securities may not be possible because (A) such transfer is
subject to contractual restrictions on transfer set forth herein and
in the Securityholders Agreement, and (B) the Executive Securities
have not been registered under the Securities Act or any applicable
state securities laws and, therefore, cannot be sold unless
subsequently registered under the Securities Act and such applicable
state securities laws or an exemption from such registration is
available.
(iv) Each of the Executive Purchasers has had an
opportunity to ask questions and receive answers concerning the terms
and conditions of the offering of the Executive Securities issued
hereunder and has had full access to such other information concerning
the Company as he has requested.
(v) This Agreement, the LLC Agreement, the
Securityholders Agreement, and the other agreements contemplated
thereby of even date therewith constitute the legal, valid and binding
obligations of each Executive Purchaser, enforceable in accordance
with their terms, and the execution, delivery and performance of such
agreements by each Executive Purchaser and Executive's employment with
the Company do not and shall not conflict with, violate or cause a
breach of any agreement, contract or instrument to which any Executive
Purchaser is a party or by which any Executive Purchaser is bound or
any judgment, order or decree to which any Executive Purchaser is
subject.
(c) Acknowledgment of At-Will Employment. As an
inducement to the LLC and the Company to enter into this Agreement, and as a
condition thereto, each of the Executive Purchasers acknowledges and agrees
that no agreement or arrangement between the Executive Purchasers and the
Company or the LLC (including, without limitation, the issuance of the
Executive Securities to the Executive Purchasers and the execution and delivery
of this Agreement) shall entitle Executive to remain in the employment of the
Company and its Subsidiaries or affect the right of the Company or its
Subsidiaries to terminate Executive's employment at any time and for any
reason. Executive's initial annual salary, which will remain subject to
changes implemented by the Board of Directors of the Company, shall be
$200,000.
2. VESTING OF EXECUTIVE SECURITIES.
(a) Vesting Schedule. Except as otherwise provided
herein, an amount of Unvested Securities (as defined below) shall vest on the
date hereof and on each of the first four anniversaries of the date hereof,
such that the Executive Securities shall be vested on each such date in
accordance with the following schedule:
- 2 -
<PAGE> 3
<TABLE>
<CAPTION>
Cumulative Percentage of Executive
Date Securities Vested on Such Date
-------------- ----------------------------------------
<S> <C>
The date hereof 20%
The first anniversary of the date hereof 40%
The second anniversary of the date hereof 60%
The third anniversary of the date hereof 80%
The fourth anniversary of the date hereof 100%
</TABLE>
Notwithstanding the foregoing sentence, and except as otherwise provided
herein, the above vesting schedule shall cease and no Unvested Securities (as
defined below) shall vest after the date on which Executive's employment with
the Company and its Subsidiaries terminates for any reason; provided that if
Executive's employment is terminated by the Company without Cause, the
Executive Securities shall thereafter continue to vest in accordance with the
above schedule so long as Executive has not committed a Vesting Termination
Breach (upon which breach the vesting schedule shall cease, and no Unvested
Securities (as defined below) shall vest on or after the date of the first such
breach). In the event the LLC or the Company has alleged that Executive has
committed a Vesting Termination Breach, Executive disputes such allegation, and
the matter is subject to the dispute resolution provisions set forth in
paragraph 6, vesting shall be tolled upon the date of the allegation of such
breach; provided that (i) if it is ultimately resolved under paragraph 6 that
Executive has committed a Vesting Termination Breach, the tolling shall become
a permanent cessation such that vesting shall have forever ceased upon the date
of such allegation, and (ii) if it is ultimately resolved under paragraph 6
that Executive did not commit a Vesting Termination Breach, a number of
Unvested Securities shall vest giving retroactive effect to such vesting
schedule such that there shall exist a number of Vested Securities as if the
vesting schedule had not been tolled as a result of such allegations.
Executive Securities which have become vested pursuant to this Agreement are
referred to herein as "Vested Securities," and all other Executive Securities
are referred to herein as "Unvested Securities."
(b) Acceleration upon a Qualified Sale of the Company.
All Unvested Securities shall become Vested Securities upon the consummation of
a Qualified Sale of the Company (as defined below) so long as Executive is
employed by the Company or any of its Subsidiaries on the date of such sale
(or, if Executive's employment was terminated by the Company without Cause, so
long as Executive has not committed a Vesting Termination Breach). A
"Qualified Sale of the Company" means either (i) the sale, lease, transfer,
conveyance or other disposition, in one or a series of related transactions, of
all or substantially all of the assets of the Company and its Subsidiaries,
taken as a whole, or (ii) a transaction or series of transactions (including by
way of merger, consolidation, or sale of stock, but not including a Public
Offering) the result of which is that the holders of the Company's outstanding
voting stock immediately prior to such transaction are after giving effect to
such transaction no longer, in the aggregate, the "beneficial owners" (as such
term is defined in Rule 13d-3 and Rule 13d-5 promulgated under the Securities
Exchange Act), directly or indirectly through one or more intermediaries, of
more than 50% of the voting power of the
- 3 -
<PAGE> 4
outstanding voting stock of the Company, in each case where the consideration
for such assets or stock in such sale or transfer consists of cash and/or
publicly traded equity securities for at least 50% of the outstanding stock of
the Company (e.g., 100% of such consideration would have to consist of cash
and/or publicly traded equity securities if only 50.01% of such stock were sold
in such transaction).
(c) Acceleration upon a Public Offering. Upon the
consummation of the Company's initial Public Offering, and so long as Executive
is employed by the Company or any of its Subsidiaries on the closing date of
such offering (or, if Executive's employment was terminated by the Company
without Cause, so long as Executive has not committed a Vesting Termination
Breach), there will vest the amount of Unvested Securities which were scheduled
to vest within the 365 days following such closing date (and the remaining
Unvested Securities, if any, shall continue to vest 20% on each anniversary of
the date hereof in accordance with clause (a) above, such that the vesting
schedule set forth in paragraph (a) above shall have been effectively
accelerated by one year).
(d) Acceleration upon Death or Disability. All Unvested
Shares shall become Vested Shares if Executive's employment with the Company or
any of its Subsidiaries terminates by reason of Executive's death or
Disability.
(e) Other Acceleration. Subject to paragraph 3(h)
hereof, any Unvested Securities which the LLC (or its assignees) has not
elected to repurchase in the Repurchase Notice (as defined below) (including
Unvested Securities originally included in the Repurchase Notice, but for which
the election to repurchase was rescinded, pursuant to the terms of paragraph 3,
by all of the LLC and/or its assignees having made such election) shall
thereafter be deemed Vested Securities.
3. LLC'S REPURCHASE OPTION.
(a) The Repurchase Option. Upon (i) the termination of
Executive's employment with the Company and its Subsidiaries for any reason
other than a termination by the Company without Cause, or (ii) if Executive's
employment is terminated by the Company without Cause, upon Executive's
commission of a Vesting Termination Breach (the occurrence of either (i) or
(ii), a "Repurchase Event"), the Executive Securities then in existence
(whether held by an Executive Purchaser or one or more of the Executive
Purchasers' transferees) will be subject to repurchase by the LLC at the LLC's
election pursuant to the terms and conditions set forth in this paragraph 3
(the "Repurchase Option"). In the event that the LLC or the Company has
alleged that Executive has committed a Vesting Termination Breach, Executive
disputes such allegation, and the matter is subject to the dispute resolution
provisions set forth in paragraph 6, the closing of the repurchase under this
paragraph 3 shall not occur unless and until it is ultimately determined that
Executive committed a Vesting Termination Breach; provided that during the
pendency of such proceeding, the Executive Securities specified in the
Repurchase Notice (as defined below) shall not be transferred by any holder
thereof to any Person.
(b) Repurchase Price. The repurchase price (the
"Repurchase Price") for any Vested Securities to be repurchased shall be the
Fair Market Value of such securities. The Repurchase Price of any Unvested
Securities to be repurchased shall be the lesser of (x) the Fair
- 4 -
<PAGE> 5
Market Value of such Securities, and (y) the Original Cost of such Securities
(with securities having the lowest Original Cost subject to repurchase prior to
securities with a higher Original Cost).
(c) Exercise of Repurchase Option. The LLC (by action of
the Board) may elect to purchase all or any portion of the Executive Securities
by delivering written notice (the "Repurchase Notice") to the holder or holders
of the Executive Securities within 30 days after the Repurchase Event. The
Repurchase Notice shall set forth the amount, type, and class of Executive
Securities (including, if applicable, the amount of Unvested Securities and/or
Vested Securities) to be acquired from each such holder. The Executive
Securities to be repurchased by the LLC shall first be satisfied to the extent
possible from the Executive Securities held by Executive at the time of
delivery of the Repurchase Notice. If the amount of Executive Securities then
held by Executive is less than the total amount of Executive Securities that
the LLC has elected to purchase, the LLC shall purchase the remaining
securities elected to be purchased from the other holder(s) of Executive
Securities, pro rata according to the amount of Executive Securities held of
record by each such other holder at the time of delivery of the Repurchase
Notice. The amount of Unvested Securities and Vested Securities to be
repurchased hereunder shall be deemed to be allocated among Executive and the
other holders of repurchased Executive Securities (if any) pro rata according
to the amount of Executive Securities to be purchased from such persons.
(d) Assignment by the LLC. The LLC, by action of the
Board, will have the right to assign all or any portion of its repurchase
rights hereunder to any holder of Investor Equity and/or to any executive
employee of the Company or any of its Subsidiaries. Notwithstanding the
foregoing, the LLC may not assign to any Person its right to pay a portion of
the Repurchase Price for Executive Securities repurchased hereunder in the form
of Class C Units (or, after the dissolution and liquidation of the LLC, a
promissory note).
(e) Fair Market Value of Repurchased Shares.
(i) The "Fair Market Value" of Executive
Securities subject to repurchase hereunder shall be determined in
accordance with this paragraph (e).
(ii) A majority interest of the LLC and/or any
assignees of the LLC's repurchase rights (based on the amount of
Executive Securities to be purchased by each) and the holders of a
majority of the Executive Securities to be repurchased shall attempt
in good faith to agree on the Fair Market Value of the Executive
Securities. Any agreement reached by such Persons shall be final and
binding on all parties hereto.
(iii) If such Persons are unable to reach such
agreement within 20 days after the giving of Repurchase Notice, the
Fair Market Value of any Executive Securities that are publicly traded
shall be the average, over a period of 21 days consisting of the date
of the Repurchase Event and the 20 consecutive business days prior to
that date, of the average of the closing prices of the sales of such
securities on all securities exchanges on which such securities may at
that time be listed, or, if there have been no sales on any such
exchange on any day, the average of the highest bid and lowest asked
prices on all such exchanges at the end of such day, or, if on any day
such securities are not so listed, the average of the
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representative bid and asked prices quoted in the Nasdaq System as of
4:00 P.M., New York time, or, if on any day such securities are not
quoted in the Nasdaq System, the average of the highest bid and lowest
asked prices on such day in the domestic over-the-counter market as
reported by the National Quotation Bureau Incorporated, or any similar
successor organization.
(iv) If such Persons are unable to reach agreement
pursuant to subparagraph (ii) within 20 days after the giving of
Repurchase Notice, and to the extent any Executive Securities are not
publicly traded:
(A) A majority interest of the LLC
and/or its assignees (based on the amount of Executive Securities to
be repurchased by each) and the holders of a majority of the Executive
Securities shall each, within 10 days thereafter, choose one
investment banker or other appraiser with experience in analyzing and
making determinations concerning matters in the telecommunications
industry and in valuing entities like the LLC (including the
distribution arrangements of the type described in the LLC Agreement),
and the two investment bankers/appraisers so selected shall together
select a third investment banker/appraiser similarly qualified.
(B) The three investment
bankers/appraisers shall first appraise the fair market value of the
Company (based on the assumption of an orderly, arm's length sale to a
willing unaffiliated buyer). The three investment bankers/appraisers
shall then appraise the fair market value of such non- publicly-traded
Executive Securities as follows:
1) the fair market value of each
share of Common Stock shall be equal to the fair market value
of the Company divided by the total number of shares of Common
Stock outstanding on the date of the Repurchase Event
(determined on a fully diluted basis (x) with respect to the
Preferred Stock and all other outstanding securities
convertible into the Company's Common Stock, assuming the
conversion of such Preferred Stock and other convertible
securities (without regard to any conditions or other
restrictions on such conversion), and (y) with respect to all
outstanding options, warrants and other rights or securities
exercisable or exchangeable for shares of the Company's Common
Stock, in accordance with the Treasury Stock Method under
generally accepted accounting principles for determination of
fully diluted earnings per share);
2) the fair market value of each
share of Preferred Stock shall be equal to the greater of (x)
the Liquidation Value (as defined in the Company's certificate
of incorporation) of such share, together with all accrued but
unpaid dividends thereon (as determined under the Company's
certificate of incorporation), and (y) the fair market value
(determined in accordance with subparagraph 1) above) of the
share(s) of Common Stock (including fractional shares) into
which such share of Preferred Stock is convertible on the date
of the Repurchase Event;
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<PAGE> 7
3) the fair market value of each
Class B Unit shall be equal to the fair market value of the
assets (as determined in accordance with subparagraphs 1), 2),
and 4) of this subparagraph (B)) that would be distributed
according to the terms of the LLC Agreement with respect to
such Class B Unit if the LLC were dissolved and liquidated on
the date of the Repurchase Event; and
4) the fair market value of any
other non-publicly-traded Executive Securities (or, for
purposes of subparagraph 3) above, any other assets) shall be
the fair value of such securities (or other assets),
determined on the basis of an orderly, arm's length sale to a
willing, unaffiliated buyer, taking into account all relevant
factors determinative of value.
The three investment bankers/appraisers shall, within thirty days of
their retention, provide the written results of such appraisals to the
LLC and/or its assignees and to each of the holders of Executive
Securities.
(C) The "Fair Market Value" of the
non-publicly-traded Executive Securities to be repurchased shall be
the average of the two appraisals closest to each other, and such
amount shall be final and binding on all parties hereto; provided that
the LLC (and/or any assignee) may at any time within five days after
receiving written notice of such determination rescind its prior
exercise of the Repurchase Option by giving written notice of such
revocation to the holder or holders of the Executive Securities to be
repurchased, and upon such revocation the revoking party will be
treated as if it had never exercised such Repurchase Option (it being
understood that such revoking parties shall thereafter have no right
to re-exercise such Repurchase Option).
(D) The costs of such appraisal shall be
allocated between the parties based on the percentage which the
portion of the contested amount not awarded to each party bears to the
amount actually contested by such party; provided that if any parties
revoke their exercise of the Repurchase Option pursuant to paragraph
(C) above, such revoking parties shall bear (pro rata among such
revoking parties based on the number of Executive Securities with
respect to which each such revoking party had initially exercised its
Repurchase Option) any appraisal costs that would be allocated to the
holder(s) of Executive Securities under this paragraph (D).
(f) Closing of the Repurchase. Within 10 business days
after the Repurchase Price for the Executive Securities to be repurchased has
been determined, the LLC shall send a notice to each holder of Executive
Securities setting forth the consideration to be paid for such shares and the
time and place for the closing of the transaction, which date shall not be more
than 30 days nor less than five days after the delivery of such notice. At
such closing, the holders of Executive Securities shall deliver all
certificates (if any exist) evidencing the Executive Securities to be
repurchased to the LLC (and/or any assignees of the LLC's repurchase right),
and the LLC (and/or any assignees) shall pay for the Executive Securities to be
purchased pursuant to the Repurchase Option by delivery of a check or wire
transfer of immediately available funds in the aggregate amount of the
Repurchase Price for such securities; provided that in the event the Board
determines
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<PAGE> 8
in its good faith discretion that the LLC is not in a position to pay in cash
any or all of the Repurchase Price for Executive Securities to be repurchased
by it:
(i) prior to the dissolution and liquidation of
the LLC, the LLC may pay a portion of the Repurchase Price for such
securities equal to (x) the aggregate Repurchase Price for the
Executive Securities to be repurchased by the LLC minus (y) the
Original Cost of such securities, by issuing in exchange for such
securities an equal number of the LLC's Class C Units (having the
rights and preferences set forth in the LLC Agreement), and for
purposes of the LLC Agreement each such Class C Unit shall as of its
issuance be deemed to have Basic Contributions made with respect to
such Class C Unit equal to (A) the aggregate portion of the Repurchase
Price paid by the issuance of Class C Units divided by (B) the number
of Class C Units so issued in such repurchase; or
(ii) after the dissolution and liquidation of the
LLC, the Company (as successor to the rights of the LLC under
paragraph 8(e)(ii) below) may pay, in the form of a promissory note, a
portion of the Repurchase Price for such securities equal to (x) the
aggregate Repurchase Price for the Executive Securities to be
repurchased by the LLC minus (y) the Original Cost of such securities.
Such a promissory note shall be subordinated to all of the Company's
senior debt obligations either then or thereafter incurred, shall earn
simple annual interest at the Base Rate, shall have all principal and
accrued interest due and payable upon maturity, and shall mature upon
the earliest to occur of the Company's initial Public Offering (if
such initial Public Offering has not occurred prior to the issuance of
such promissory note), a Qualified Sale of the Company, or the fifth
anniversary of the issuance of such promissory note.
The purchasers of Executive Securities hereunder shall be entitled to receive
customary representations and warranties from the sellers regarding good title
to such shares, free and clear of any liens or encumbrances.
(g) Restrictions. Notwithstanding anything to the
contrary contained in this Agreement, all repurchases of Executive Securities
by the LLC shall be subject to applicable restrictions contained in the
Delaware General Corporation Law, the Delaware Limited Liability Company Act
and in the LLC's and its Subsidiaries' debt and equity financing agreements.
If any such restrictions prohibit the repurchase of Executive Securities
hereunder which the LLC is otherwise entitled or required to make, the time
periods provided in this paragraph 3 shall be suspended, and the LLC may make
such repurchases as soon as it is permitted to do so under such restrictions,
unless by such time such Repurchase Option has terminated pursuant to paragraph
3(h); provided that notwithstanding the foregoing, in no event shall the time
periods provided in this paragraph 3 be suspended for more than 6 months.
(h) Termination of Repurchase Option. The rights under
this paragraph 3 of the LLC and/or its assignees to repurchase Vested
Securities (but not Unvested Securities) shall terminate upon the consummation
of a Public Offering. All rights under this paragraph 3 of the LLC and/or its
assignees to repurchase Executive Securities (including both Vested Securities
and Unvested Securities) shall terminate upon a Qualified Sale of the Company.
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<PAGE> 9
4. RESTRICTIONS ON TRANSFER.
(a) Opinion of Valid Transfer. In addition to any other
restrictions on transfer imposed by this Agreement, the Securityholders
Agreement, or the LLC Agreement, no holder of Executive Securities may sell,
transfer or dispose of any Executive Securities (except pursuant to an
effective registration statement under the Securities Act) without first
delivering to the LLC an opinion of counsel (reasonably acceptable in form and
substance to the LLC) that neither registration nor qualification under the
Securities Act and applicable state securities laws is required in connection
with such transfer.
(b) Restrictive Legend. The certificates representing
Executive Securities shall bear the following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ORIGINALLY ISSUED
ON AUGUST 13, 1997, HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE,
AND SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF
AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR AN EXEMPTION FROM
REGISTRATION THEREUNDER. THE SECURITIES REPRESENTED BY THIS
CERTIFICATE ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON TRANSFER
AND REPURCHASE OPTIONS SET FORTH IN AN EXECUTIVE PURCHASE AGREEMENT
BETWEEN THE ISSUER OF SUCH SECURITIES (THE "ISSUER") AND THE INITIAL
HOLDER OF SUCH SECURITIES (THE "INITIAL HOLDER"). A COPY OF SUCH
AGREEMENT MAY BE OBTAINED BY THE HOLDER HEREOF AT THE ISSUER'S
PRINCIPAL PLACE OF BUSINESS WITHOUT CHARGE."
The legend set forth above shall be removed from the certificates evidencing
any shares which cease to be Executive Securities.
(c) Retention of Executive Stock.
(i) No Executive Purchaser shall sell, transfer,
assign, pledge or otherwise dispose of (whether with or without
consideration and whether voluntarily or involuntarily or by operation
of law) any interest in any Executive Securities (a "Transfer"),
except pursuant to (A) the repurchase provisions of paragraph 3 hereof
or of the LLC Agreement, (B) the "Participation Rights" or "Put"
provisions set forth in the Securityholders Agreement, or (C) a Sale
of the Company (as defined in the Securityholders Agreement) (each of
(A), (B), and (C), an "Exempt Transfer").
(ii) The restrictions contained in this paragraph
(c) shall not apply with respect to transfers of Executive Securities
(A) pursuant to applicable laws of descent and distribution or (B)
among Executive's Family Group; provided that the restrictions
contained in this paragraph shall continue to be applicable to the
Executive Securities after any such
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<PAGE> 10
Transfer, the transferees of such Executive Securities shall have
agreed in writing to be bound by the provisions of this Agreement with
respect to the Executive Securities so transferred, and (prior to the
death of Executive) each such transferee of Executive Securities shall
have entered into proxies and other agreements satisfactory to the
holders of a majority of the Investor Equity pursuant to which
Executive shall have the sole right to vote such Executive Securities
for all purposes. For purposes of this Agreement, "Family Group"
means Executive's spouse and descendants (whether natural or adopted),
any trust which at the time of such Transfer and at all times
thereafter is and remains solely for the benefit of Executive and/or
Executive's spouse and/or descendants and any family partnership the
partners of which consist solely of Executive, such spouse, such
descendants or such trusts.
(iii) The restrictions on the transfer of Executive
Securities set forth in this paragraph (c) shall continue with respect
to each Executive Security following any Transfer thereof (other than
an Exempt Transfer); provided that upon the consummation of a Public
Offering the restrictions set forth in this paragraph (c) shall
thereafter cease to apply to all Vested Securities (it being
understood that such restrictions shall continue to apply to all
Unvested Securities until such time as they become Vested Securities
in accordance with the terms hereof).
5. ISSUANCE OF TIER I AND TIER II OPTIONS.
(a) In the event of a dissolution and liquidation of the
LLC upon the consummation of a Public Offering (a "Public Offering
Liquidation"), if the Management Percentage for such Public Offering
Liquidation is less than 33.3% the Company shall contemporaneously with such
liquidation issue to each holder of Class B Units:
(i) options (the "Tier I Options") entitling the
holder to acquire, at an exercise price per share equal to the IPO
Price, a number of shares of the Company's Common Stock equal to the
lesser of (x) the number of shares of Common Stock that such holder
would have received under the LLC Agreement in connection with such
Public Offering Liquidation if the Management Percentage had been 10%,
and (y) the difference of (A) the number of shares of Common Stock
that such holder would have received in connection with such Public
Offering Liquidation if the Management Percentage had been 33.3%,
minus (B) the number of shares of Common Stock that such holder
actually received in such liquidation; and
(ii) if the Management Percentage for such Public
Offering Liquidation is less than 23.3%, in addition to any Tier I
Options, options (the "Tier II Options") entitling the holder to
acquire, at an exercise price per share equal to the Tier II Price, a
number of shares of the Company's Common Stock equal to the lesser of
(x) the number of shares of Common Stock that such holder would have
received in connection with such Public Offering Liquidation if the
Management Percentage had been 10%, and (y) the difference of (A) the
number of shares of Common Stock that such holder would have received
in connection with such Public Offering Liquidation if the Management
Percentage had been 33.3%, minus (B) the number of shares of Common
Stock that such holder actually received
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<PAGE> 11
in such liquidation, minus (C) the number of shares of Common Stock
into which the Tier I Options issued to such holder are initially
exercisable.
(b) For purposes of performing the calculations in
subparagraphs (a)(i) and (ii) above, (i) a distribution of shares of the
Company's Preferred Stock in a Public Offering Liquidation shall be considered
to have been a distribution of the number of shares of Common Stock into which
such Preferred Stock is convertible on the date of such liquidation, and (ii) a
distribution of any other property in a Public Offering Liquidation shall be
considered to have been a distribution of a number of shares of Common Stock
equal to the quotient of (A) the aggregate fair market value of such
distributed property on the date of such liquidation, as determined in good
faith by the Board, divided by (B) the fair market value of one share of Common
Stock on the date of such liquidation, as determined in good faith by the
Board.
(c) For purposes of this paragraph, the following terms
shall have the meanings set forth below:
"IPO Price" means the gross price per share at which shares of
the Company's Common Stock are initially offered and sold to the public in
connection with a Public Offering.
"Liquidation FMV" has the meaning ascribed to such term in
the LLC Agreement.
"Management Percentage" has the meaning ascribed to such term
in the LLC Agreement.
"Return Multiple" has the meaning ascribed to such term in
the LLC Agreement.
"Tier II Price" means, with respect to a particular Public
Offering Liquidation, the quotient of (x) the amount that would result in a
Return Multiple of 3.5 if the Liquidation FMV for such liquidation were equal
to such amount, divided by (y) the number of shares of Common Stock (determined
on an as-if-converted basis) held by the LLC immediately prior to such
liquidation.
6. CONFIDENTIALITY, NONCOMPETE, AND NONSOLICITATION.
(a) Nondisclosure and Nonuse of Confidential Information.
Executive shall not disclose or use at any time, either during his employment
with the Company or thereafter, any Confidential Information (as defined below)
of which Executive is or becomes aware, whether or not such information is
developed by him, except to the extent that such disclosure or use is directly
related to and required by Executive's performance of duties assigned to
Executive by the LLC or the Company, or to the extent such disclosure is
permissible under the confidentiality provisions set forth in the Stock
Purchase Agreement. Executive shall take all appropriate steps to safeguard
Confidential Information and to protect it against disclosure, misuse,
espionage, loss and theft. As used in this Agreement, the term "Confidential
Information" means information that is not generally known to the public and
that is used, developed or obtained by the LLC, the Company, or its
Subsidiaries in connection with their business, including but not limited to
(i) products or services, (ii) fees, costs and pricing structures, (iii)
designs, (iv) analysis, (v) drawings, photographs and
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<PAGE> 12
reports, (vi) computer software, including operating systems, applications and
program listings, (vii) flow charts, manuals and documentation, (viii) data
bases, (ix) accounting and business methods, (x) inventions, devices, new
developments, methods and processes, whether patentable or unpatentable and
whether or not reduced to practice, (xi) customers and clients and customer or
client lists, (xii) copyrightable works, (xiv) all technology and trade
secrets, (xv) business plans and financial models, and (xvi) all similar and
related information in whatever form. Confidential Information shall not
include any information that has been published in a form generally available
to the public prior to the date Executive proposes to disclose or use such
information. Information shall not be deemed to have been published merely
because individual portions of the information have been separately published,
but only if all material features constituting such information have been
published in combination. Notwithstanding the foregoing, "Confidential
Information" shall not include any information of which (a) Executive became
aware prior to his affiliation with the Company and the LLC, (b) Executive
learns from sources other than the LLC, the Company or its Subsidiaries,
whether prior to or after such information is actually disclosed by the LLC,
the Company or its Subsidiaries or (c) is disclosed in a prospectus or other
documents for dissemination to the public.
(b) The Company's Ownership of Intellectual Property.
(i) Acknowledgment of Company Ownership. In the
event that Executive as part of his activities on behalf of the
Company generates, authors or contributes to any invention, design,
new development, device, product, method or process (whether or not
patentable or reduced to practice or constituting Confidential
Information), any copyrightable work (whether or not constituting
Confidential Information) or any other form of Confidential
Information relating directly or indirectly to the Company's business
as now or hereafter conducted (collectively, "Intellectual Property"),
Executive acknowledges that such Intellectual Property is the
exclusive property of the Company and hereby assigns all right, title
and interest in and to such Intellectual Property to the Company. Any
copyrightable work prepared in whole or in part by Executive will be
deemed "a work made for hire" under Section 201(b) of the 1976
Copyright Act, and the Company shall own all of the rights comprised
by the copyright therein. Executive shall promptly and fully disclose
all Intellectual Property to the Company and shall cooperate with the
Company to protect the Company's interests in and rights to such
Intellectual Property (including, without limitation, providing
reasonable assistance in securing patent protection and copyright
registrations and executing all documents as reasonably requested by
the Company, whether such requests occur prior to or after termination
of Executive's employment with the Company).
(ii) Executive Invention. Executive understands
that paragraph (b)(i) of this Agreement regarding the Company's
ownership of Intellectual Property does not apply to any invention for
which no equipment, supplies, facilities or trade secret information
of the Company were used and which was developed entirely on
Executive's own time, unless (i) the invention relates to the business
of the Company or to the Company's actual or demonstrably anticipated
research or development or (ii) the invention results from any work
performed by Executive for the Company.
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<PAGE> 13
(c) Delivery of Materials upon Termination of Employment.
As requested by the Company from time to time and upon the termination of
Executive's employment with the Company for any reason, Executive shall
promptly deliver to the Company all copies and embodiments, in whatever form,
of all Confidential Information and Intellectual Property in Executive's
possession or within his control (including, but not limited to, written
records, notes, photographs, manuals, notebooks, documentation, program
listings, flow charts, magnetic media, disks, diskettes, tapes and all other
materials containing any Confidential Information or Intellectual Property)
irrespective of the location or form of such material and, if requested by the
Company, shall provide the Company with written confirmation that all such
materials have been delivered to the Company.
(d) Noncompete. Executive acknowledges and agrees with
the Company and the LLC that in the course of his employment with the Company
he shall become familiar with the Company's trade secrets and with other
Confidential Information concerning the Company and the LLC, that Executive's
services to the Company and the LLC are unique in nature and of an
extraordinary value to the Company and the LLC, and that the Company and the
LLC would be irreparably damaged if Executive were to provide similar services
to any person or entity competing with the LLC or the Company or engaged in a
similar business. In connection with the issuance to Executive of the
Executive securities hereunder, in consideration of and as an inducement to the
LLC's and the Company's entering into this Agreement and the Company's agreeing
to issue the Tier I and Tier II Options and to assume the obligations of the
LLC upon dissolution and liquidation thereof, and in further consideration of
the Noncompete Compensation (as defined below), Executive accordingly covenants
and agrees with the Company and the LLC that during the Noncompete Period (as
defined below), Executive shall not, directly or indirectly, either for himself
or for or through any other individual, corporation, partnership, joint venture
or other entity, participate in any business or enterprise conducting business
in any Covered MSA which engages or proposes to engage in the provision of
telecommunications services. For purposes of this Agreement, (i) the term
"participate in" shall include, without limitation, having any direct or
indirect interest in any corporation, partnership, joint venture or other
entity, whether as a sole proprietor, owner, stockholder, partner, joint
venturer, creditor or otherwise, or rendering any direct or indirect service or
assistance to any individual, corporation, partnership, joint venture and other
business entity (whether as a director, officer, manager, supervisor, employee,
agent, consultant or otherwise), other than ownership of up to 2% of the
outstanding stock of any class which is publicly traded, (ii) the term "MSA"
means metropolitan statistical area and (iii) the term "Covered MSA" means (1)
any MSA in which the Company is engaged in business or has at any time had an
Approved Business Plan (as defined in the Stock Purchase Agreement) to engage
in business, (2) the MSAs which include Dallas, New York, Atlanta, Chicago and
Los Angeles (the "Top Five MSAs"), (3) from and after the time at which there
are Approved Business Plans for each of the Top Five MSAs, each of the MSAs
which include Boston, Cleveland, Denver, Detroit, Houston, Miami, Northern New
Jersey, Phoenix, Philadelphia, St. Louis, San Diego, San Francisco, San Jose,
Seattle and Washington, D.C. and (4) any other MSA for which a business plan
has been submitted to the Company pursuant to the Stock Purchase Agreement on
or prior to the termination of Executive's Employment or for which Company
personnel have taken substantial steps towards completing, provided, that any
such MSA under this clause (4) shall cease to be a Covered MSA if such business
plan does not become an Approved Business Plan within the earlier of (x) 180
days after such submission and (y) 180 days after the termination of
Executive's Employment, and, in each case, the Company's management and
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<PAGE> 14
the LLC have attempted in good faith during such period to reach agreements
that would enable such plan to become an Approved Business Plan.
Notwithstanding the foregoing, the term Covered MSA shall not include any Top
Five MSA which is not subject to an Approved Business Plan if business plans
for at least three of such Top Five MSAs have not become Approved Business
Plans prior to the later of (x) the 180th day after the date on which the
Company has employed a president and chief operating officer approved by the
Board's Executive Committee or (y) the 180th day after business plans for each
of the Top Five MSAs have been submitted to the Company and the LLC for
approval pursuant to the Stock Purchase Agreement (which business plans are
eligible to qualify as Approved Business Plans because, among other things,
they specify each of the items required under Section 3A of the Stock Purchase
Agreement to be specified in an Approved Business Plan and do not require
equity capital beyond the Maximum Commitment (as defined in the Stock Purchase
Agreement), and Executive has worked in good faith to seek to have such plans
become Approved Business Plans by such time. Executive agrees that this
covenant is reasonable with respect to its duration, geographical area and
scope.
(e) Nonsolicitation. During the Noncompete Period,
Executive shall not (i) induce or attempt to induce any employee of the Company
or any Subsidiary to leave the employ of the Company or any Subsidiary, or in
any way interfere with the relationship between the Company or any Subsidiary
and any employee thereof, (ii) hire directly or through another entity any
person who was an employee of the Company or any Subsidiary at any time during
the six months prior to the date such person is to be so hired, or (iii) induce
or attempt to induce any customer, supplier, licensee or other business
relation of the LLC, the Company or any Subsidiary to cease doing business with
the LLC, the Company or any Subsidiary, or in any way interfere with the
relationship between any such customer, supplier, licensee or business relation
and the LLC, the Company and its Subsidiaries (including, without limitation,
making any negative statements or communications concerning the LLC, the
Company or any Subsidiary).
(f) Noncompete Period. The "Noncompete Period" shall
commence on the date hereof and shall continue until (i) if Executive is
terminated prior to the third anniversary of the date hereof, the later of (A)
the fourth anniversary of the date hereof and (B) the second anniversary of the
date of termination, (ii) if Executive is terminated on or after the third
anniversary, but prior to the fourth anniversary, of the date hereof, the fifth
anniversary of the date hereof, and (iii) if Executive is terminated on or
after the fourth anniversary hereof, the first anniversary of the date of
termination; provided that the Noncompete Period shall terminate if at any time
after the date of termination the Company ceases to pay Executive his
Noncompete Compensation (unless Executive violates any covenant set forth in
this paragraph 6, in which case the Noncompete Period shall continue even
absent payment of the Noncompete Compensation). "Noncompete Compensation"
shall consist of 100% of the base salary that Executive received as
compensation from the Company and its Subsidiaries immediately prior to
termination (Executive's "Previous Salary") together with the continuation of
the medical benefits that the Company provided to Executive immediately prior
to termination (Executive's "Previous Benefits"); provided that if at any time
during the Noncompete Period Executive obtains other employment, Executive's
Noncompete Compensation shall during the period of such employment (i) be
reduced (but not below zero) by Executive's compensation for such employment
and (ii) shall not include the continued provision of medical benefits if such
employment provides medical benefits comparable to the Previous Benefits.
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<PAGE> 15
(g) Judicial Modification. If the final judgment of a
court of competent jurisdiction, or any final non-appealable decision of an
arbitrator in connection with a mandatory arbitration, declares that any term
or provision of this paragraph is invalid or unenforceable, the parties agree
that the court making the determination of invalidity or unenforceability shall
have the power to reduce the scope, duration, or geographic area of the term or
provision, to delete specific words or phrases, or to replace any invalid or
unenforceable term or provision with a term or provision that is valid and
enforceable and that comes closest to expressing the intention of the invalid
or unenforceable term or provision, and this Agreement shall be enforceable as
so modified after the expiration of the time within which the judgment or
decision may be appealed.
(h) Dispute Resolution.
(i) Arbitration. All claims, disputes,
controversies and other matters in question arising out of or relating
to this paragraph 6, or to the alleged breach hereof, shall be settled
by preliminary negotiation between the LLC or other Person bringing
such allegation and the Executive (the "parties") or, if such
preliminary negotiation is unsuccessful for any reason (but in any
event not later than 10 days after commencement of such negotiation),
by binding arbitration in accordance with the procedures set forth in
this paragraph (h). Without limiting the mandatory arbitration
provision set forth in this paragraph (h), each of the parties hereto
(A) waives the right to bring an action in any court of competent
jurisdiction with respect to any such claims, controversies and
disputes (other than any such action to enforce the award or other
remedy resulting from any arbitration pursuant to this paragraph (h)
or to prevent any arbitrator from exceeding the authority granted to
the arbitrators hereunder) and (B) waives the right to trial by jury
in any suit, action or other proceeding brought on, with respect to or
in connection with this Agreement.
(ii) Binding Arbitration. Upon filing of a notice
of demand for binding arbitration by any party hereto, arbitration
shall be commenced and conducted as follows:
(A) Arbitrators. All claims, disputes,
controversies and other matters (collectively "matters") in
question shall be referred to and decided and settled by a
panel of three arbitrators with experience in analyzing,
understanding, and making determinations concerning matters in
the telecommunications industry, one selected by each of the
parties and the third by the two arbitrators so selected.
(B) Cost of Arbitration. The cost of
each arbitration proceeding, including without limitation the
arbitrators' compensation and expenses, hearing room charges,
court reporter transcript charges, etc., shall be allocated
among the parties based upon the percentage which the portion
of the contested amount not awarded to each party bears to the
amount actually contested by such party. The arbitrators
shall also award the party that prevails substantially in its
pre-hearing position its reasonable attorneys' fees and costs
incurred in connection with the arbitration. The arbitrators
are specifically instructed to award attorneys' fees for
instances of abuse of the discovery process.
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<PAGE> 16
(C) Situs of Proceedings. The situs of
the arbitration shall be in New York, New York, or such other
place as is mutually agreeable to the parties.
(iii) Pre-hearing Discovery. The parties shall
have the right to conduct and enforce pre- hearing discovery in
accordance with the then current Federal Rules of Civil Procedure,
subject to the following limitations: (A) each party may serve no more
than one set of interrogatories which set shall ask no more than
twenty questions; (B) each party may depose the other party's expert
witnesses who will be called to testify at the hearing, plus up to six
fact witnesses without regard to whether they will be called to
testify (each party will be entitled to a total of not more than 24
hours of depositions of the other party's witnesses, and not more than
6 hours with respect to any single witness); and (C) document
discovery and other discovery shall be under the control of and
enforceable by the arbitrators, and all disputes relating thereto
shall be decided by the arbitrators. Notwithstanding any contrary
foregoing provisions, the arbitrators shall have the power and
authority to, and to the fullest extent practicable shall, abbreviate
arbitration discovery in a manner which is fair to all parties in
order to expedite the conclusion of each alternative dispute
resolution proceeding.
(iv) Pre-hearing Conference. Within thirty (30)
days after filing of notice of demand for binding arbitration, the
arbitrators shall hold a pre-hearing conference to establish schedules
for completion of discovery, for exchange of exhibit and witness
lists, for arbitration briefs, for the hearing, and to decide
procedural matters and all other questions that may be presented.
(v) Hearing Procedures. The hearing shall be
conducted to preserve its privacy and to allow reasonable procedural
due process. Rules of evidence need not be strictly followed, and the
hearing shall be streamlined as follows: (A) documents shall be
self-authenticating, subject to valid objection by the opposing party;
(B) expert reports, witness biographies, depositions and affidavits
may be utilized, subject to the opponent's right of a live
cross-examination of the witness in person; (C) charts, graphs and
summaries shall be utilized to present voluminous data, provided (1)
that the underlying data was made available to the opposing party
thirty (30) days prior to the hearing, and (2) that the preparer of
each chart, graph or summary is available for explanation and live
cross-examination in person; (D) the hearing should be held on
consecutive business days without interruption to the maximum extent
practicable; and (E) the arbitrators shall establish all other
procedural rules for the conduct of the arbitration in accordance with
the rules of arbitration of the American Arbitration Association.
(vi) Governing Law. This arbitration provision
shall be governed by, and all rights and obligations specifically
enforceable under and pursuant to, the Federal Arbitration Act (9
U.S.C. Section 1, etseq.).
(vii) Consolidation. No arbitration shall include,
by consolidation, joinder or in any other manner, any additional
person not a party to this Agreement (other than affiliates of any
such party, which affiliates may be included in the arbitration),
except by written consent of the parties hereto containing a specific
reference to this Agreement.
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<PAGE> 17
(viii) Award; Time Limit. The arbitrators are
empowered to render an award of general compensatory damages and
equitable relief (including, without limitation, injunctive relief),
but is not empowered to award punitive damages. The award rendered by
the arbitrators (A) shall be final; (B) shall not constitute a basis
for collateral estoppel as to any issue; and (C) shall not be subject
to vacation or modification. The arbitrators shall render any award
or otherwise conclude the arbitration no later than 120 days after the
date notice is given pursuant to this paragraph (h).
(ix) Confidentiality. The Parties hereto will
maintain the substance of any proceedings hereunder in confidence and
the arbitrators, prior to any proceedings hereunder, will sign an
agreement whereby the arbitrator agrees to keep the substance of any
proceedings hereunder in confidence.
7. DEFINITIONS.
"Approved Business Plan" has the meaning ascribed to such term
in the Stock Purchase Agreement.
"Basic Contributions" has the meaning ascribed to such term in
the LLC Agreement.
"Board" means the board of managers of the LLC (or, after the
dissolution and liquidation of the LLC, the board of directors of the Company).
"Cause" means (A) Executive's theft or embezzlement, or
attempted theft or embezzlement, of money or property of the Company or the
LLC, Executive's perpetration or attempted perpetration of fraud, or
Executive's participation in a fraud or attempted fraud, on the Company or the
LLC, or Executive's unauthorized appropriation of, or attempt to
misappropriate, any tangible or intangible assets or property of the Company or
the LLC, (B) any act or acts of disloyalty, misconduct or moral turpitude by
Executive injurious to the interest, property, operations, business or
reputation of the Company or the LLC, or Executive's conviction of a crime the
commission of which results in injury to the Company or the LLC or (C)
Executive's repeated refusal or failure (other than by reason of Disability) to
carry out reasonable instructions by his superiors or the Board or the
Company's board of directors.
"Class A Units" has the meaning ascribed to such term in the
LLC Agreement.
"Class B Units" has the meaning ascribed to such term in the
LLC Agreement.
"Class C Units" has the meaning ascribed to such term in the
LLC Agreement.
"Class D Units" has the meaning ascribed to such term in the
LLC Agreement.
"Common Stock" means the Company's Common Stock, par value
$.01 per share.
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<PAGE> 18
"Disability" means (i) any permanent physical or mental
incapacity or disability rendering the Executive unable or unfit to perform
effectively the duties and obligations of his employment or to participate
effectively and actively in the management of the Company, or (ii) any
illness, accident, injury, physical or mental incapacity or other disability,
where such condition has rendered the Executive unable or unfit to perform
effectively the duties and obligations of his employment or to participate
effectively and actively in the management of the Company for a period of at
least 90 days (in either case, as determined in the good faith judgment of the
Company's board of directors).
"Executive Securities" means (i) the Class B Units issued to
the Executive Purchasers hereunder, (ii) upon dissolution and liquidation of
the LLC, any securities of the Company distributed in respect of the securities
referred to in clause (i) above pursuant to such dissolution and liquidation,
(iii) any Tier I Options or Tier II Options issued to any holder of Executive
Securities hereunder, (iv) any other securities of the LLC or the Company
hereafter acquired by Executive, and (v) any securities issued directly or
indirectly with respect to the foregoing securities by way of a stock split,
stock dividend, or other division of securities, or in connection with a
combination of securities, recapitalization, merger, consolidation, or other
reorganization, or upon conversion or exercise of any of the foregoing
securities. As to any particular securities constituting Executive Securities,
such securities shall cease to be Executive Securities when they have been (a)
effectively registered under the Securities Act and disposed of in accordance
with the registration statement covering them, (b) distributed to the public
through a broker, dealer or market maker pursuant to Rule 144 under the
Securities Act (or any similar provision then in force) or (c) repurchased by
any holder of Class A Units, or by the LLC (including in exchange for Class C
Units or Class D Units), the Company or any Subsidiary thereof
"Investor Equity" means (i) the Class A Units issued pursuant
to the Investor Purchase Agreement, (ii) upon and after the dissolution or
liquidation of the LLC, the securities distributed in respect of the securities
referred to in clause (i) above pursuant to such dissolution or liquidation,
and (iii) any securities issued directly or indirectly with respect to the
foregoing securities by way of a stock split, stock dividend, or other division
of securities, or in connection with a combination of securities,
recapitalization, merger, consolidation, or other reorganization, or upon
conversion or exercise of the foregoing (but not including any Class D Units
issued in exchange for Class A Units). As to any particular securities
constituting Investor Equity, such securities shall cease to be Investor Equity
when they have been (a) effectively registered under the Securities Act and
disposed of in accordance with the registration statement covering them, (b)
distributed to the public through a broker, dealer or market maker pursuant to
Rule 144 under the Securities Act (or any similar provision then in force) or
(c) repurchased by the LLC (including in exchange for Class D Units) or the
Company or any Subsidiary thereof.
"LLC Agreement" means the limited liability company agreement
of even date herewith, entered into by and among the members of the LLC, as
amended from time to time in accordance with its terms.
"MSA" means a metropolitan statistical area.
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<PAGE> 19
"Original Cost" means, at any given time, (i) with respect to
any Class B Units, the total Basic Contributions made with respect to such
Class B Units pursuant to the LLC Agreement prior to such time, (ii) with
respect to any Preferred Stock, the aggregate Liquidation Value (as determined
under the Company's certificate of incorporation) of such Preferred Stock at
such time, (iii) with respect to any Common Stock issued upon conversion of
Preferred Stock, the Original Cost of such Preferred Stock, and (iv) with
respect to any other securities, the original price paid upon issuance of such
securities.
"Person" means an individual, a partnership, a corporation, a
limited liability company, an association, a joint stock company, a trust, a
joint venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
"Preferred Stock" means the Company's 12% Cumulative
Convertible Preferred Stock, par value $.01 per share.
"Public Offering" means any underwritten sale of the Company's
common stock pursuant to an effective registration statement under the
Securities Act filed with the Securities and Exchange Commission on Form S-1
(or a successor form adopted by the Securities and Exchange Commission);
provided that the following shall not be considered a Public Offering: (i) any
issuance of common stock as consideration or financing for a merger or
acquisition, and (ii) any issuance of common stock or rights to acquire common
stock to employees of the Company or its Subsidiaries as part of an incentive
or compensation plan.
"Securities Act" means the Securities Act of 1933, as amended,
or any similar federal law then in force.
"Securityholders Agreement" means the securityholders
agreement entered into by and among the Company, the LLC, and the holders of
interests in the LLC, as amended from time to time in accordance with its
terms.
"Stock Purchase Agreement" means the stock purchase agreement
of even date herewith, entered into by and between the Company and the LLC, as
amended from time to time in accordance with the terms thereof.
"Subsidiary" means, with respect to any Person, any
corporation, limited liability company, partnership, association or other
business entity of which (i) if a corporation, a majority of the total voting
power of shares of stock entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees thereof
is at the time owned or controlled, directly or indirectly, by that Person or
one or more of the other Subsidiaries of that Person or a combination thereof,
or (ii) if a limited liability company, partnership, association or other
business entity, a majority of the partnership or other similar ownership
interest thereof is at the time owned or controlled, directly or indirectly, by
any Person or one or more Subsidiaries of that Person or a combination thereof.
For purposes hereof, a Person or Persons shall be deemed to have a majority
ownership interest in a limited liability company, partnership, association or
other business entity if such Person or Persons shall be allocated a majority
of limited liability company,
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<PAGE> 20
partnership, association or other business entity gains or losses or shall be
or control any managing director or general partner of such limited liability
company, partnership, association or other business entity.
"Vesting Termination Breach" means (i) any breach of paragraph
6(d) or clause (ii) of paragraph 6(e) and (ii) any breach of any other
provision of paragraph 6 which is material or is intentionally and knowingly
committed by Executive.
8. MISCELLANEOUS PROVISIONS.
(a) Further Assurances; Voting Proxy. As a condition to
the LLC's and the Company's entering into this Agreement and the LLC's issuance
of Executive Securities to the Executive Purchasers, and as further
consideration therefor:
(i) Executive hereby unconditionally guarantees
the full and prompt performance of each Executive Purchaser's
obligations under this Agreement and under each of the agreements
contemplated hereby to which such Executive Purchaser is a party, and
Executive agrees that he will take all necessary or desirable actions
to ensure such performance as are reasonably requested by the LLC or
the Company. Executive further agrees that he will not provide any
directions to an Executive Purchaser that are contrary to any
obligation imposed on such Executive Purchaser under this Agreement or
under such other agreements, and that Executive will not fail to
provide any directions to an Executive Purchaser if such failure would
cause an Executive Purchaser not to satisfy its obligations hereunder
or thereunder. This guarantee shall be irrevocable with respect to
each Executive Security held by an Executive Purchaser (and shall
survive any transfer thereof, or the death, disability, incompetency,
or bankruptcy of such Executive Purchaser) until such time as such
Executive Security is transferred in accordance with the terms hereof
to a Person other than a member of Executive's Family Group, at which
time this guarantee shall be deemed revoked with respect to such
security (but not with respect to any other Executive Securities). No
invalidity, irregularity or unenforceability of this Agreement or such
other agreements by reason of an Executive Purchaser's incapacity,
minor status, incompetency, bankruptcy, insolvency, or otherwise shall
impair, affect or be a defense to the obligations of Executive under
this guarantee.
(ii) Each Executive Purchaser (other than
Executive) hereby appoints Executive as his true and lawful proxy and
attorney-in-fact, with full power of substitution, to vote all of such
Executive Purchaser's Executive Securities on all matters to be voted
on by the holders of such securities (whether as a member vote, a
shareholder vote, an approval right under this Agreement or the other
agreements contemplated hereby, or otherwise). These proxies and
powers granted by each Executive Purchaser pursuant to this paragraph
are coupled with an interest, and are given to secure such Executive
Purchasers' obligations under this Agreement and the other agreements
contemplated hereby to which the Executive Purchasers are parties.
Such proxies and powers shall be irrevocable with respect to each
Executive Security held by an Executive Purchaser (and shall survive
any transfer thereof, or the death, disability, incompetency, or
bankruptcy of such Executive Purchaser) until such
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<PAGE> 21
time as such Executive Security is transferred in accordance with the
terms hereof to a Person other than a member of Executive's Family
Group, at which time such proxy shall be deemed revoked with respect
to such security (but not with respect to any other Executive
Securities).
(b) Transfers in Violation of Agreement. Any Transfer or
attempted Transfer of any Executive Securities in violation of any provision of
this Agreement shall be void, and none of the LLC, the Company, or any
Subsidiary thereof shall record such purported Transfer on its books or treat
any purported transferee of such Executive Securities as the owner of such
securities for any purpose.
(c) Severability. Whenever possible, each provision of
this Agreement shall be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Agreement is held to be
invalid, illegal or unenforceable in any respect under any applicable law or
rule in any jurisdiction, such invalidity, illegality or unenforceability shall
not affect any other provision or any other jurisdiction, but this Agreement
shall be reformed, construed and enforced in such jurisdiction as if such
invalid, illegal or unenforceable provision had never been contained herein.
(d) Complete Agreement. This Agreement, those documents
expressly referred to herein and other documents of even date herewith embody
the complete agreement and understanding among the parties and supersede and
preempt any prior understandings, agreements or representations by or among the
parties, written or oral, which may have related to the subject matter hereof
in any way.
(e) Counterparts. This Agreement may be executed in
separate counterparts, none of which need contain the signature of more than
one party hereto but each of which shall be deemed to be an original and all of
which taken together shall constitute one and the same agreement.
(f) Successors and Assigns.
(i) Except as otherwise provided herein, this
Agreement shall bind the parties hereto and their respective
successors and assigns and shall inure to the benefit of and be
enforceable by the parties hereto and their respective successors and
assigns whether so expressed or not.
(ii) Each of the Company, the LLC, each of the
Executive Purchasers, and each holder of Executive Securities hereby
acknowledges that upon and after the dissolution and liquidation of
the LLC, (A) all contractual obligations and duties of the LLC
hereunder shall thereafter bind and be enforceable against the
Company, (B) all rights and powers granted to the LLC hereunder
(including, without limitation, the repurchase rights set forth in
paragraph 3) shall inure to the benefit of and be enforceable by the
Company, (C) all references to the LLC shall thereafter be deemed to
be references to the Company, and (D) this Agreement shall thereafter
operate and be construed as if the word "Company" were substituted for
the word "LLC" in each such instance.
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<PAGE> 22
(g) CHOICE OF LAW. ALL QUESTIONS CONCERNING THE
CONSTRUCTION, VALIDITY, ENFORCEMENT AND INTERPRETATION OF THIS AGREEMENT AND
THE EXHIBITS HERETO SHALL BE GOVERNED BY THE INTERNAL LAW, AND NOT THE LAW OF
CONFLICTS, OF THE STATE OF DELAWARE.
(h) Remedies. Each of the parties to this Agreement
(including any holder of Investor Equity or employee of the Company to which
the LLC assigns any of its repurchase rights under paragraph 3 hereof) shall be
entitled to enforce its rights under this Agreement specifically, to recover
damages and costs (including reasonable attorney's fees) caused by any breach
of any provision of this Agreement and to exercise all other rights existing in
its favor. The parties hereto agree and acknowledge that money damages would
not be an adequate remedy for any breach of the provisions of this Agreement
and that any party may in its sole discretion apply to any court of law or
equity of competent jurisdiction (without posting any bond or deposit) for
specific performance and/or other injunctive relief in order to enforce or
prevent any violations of the provisions of this Agreement.
(i) Amendment, Modification, or Waiver. The provisions
of this Agreement may be amended, modified, or waived only with the prior
written consent of the LLC and the Executive.
(j) Third-Party Beneficiaries. The parties hereto
acknowledge and agree that certain provisions of this Agreement are intended
for the benefit of certain holders of Investor Equity or employees of the
Company to which the LLC assigns any of its repurchase rights under paragraph 3
hereof, that such Persons are third-party beneficiaries of this Agreement and
that provisions of this Agreement shall be enforceable by such Persons as
provided herein.
(k) Business Days. If any time period for giving notice
or taking action hereunder expires on a day which is a Saturday, Sunday or
legal holiday in the State of Illinois, the time period shall be automatically
extended to the business day immediately following such Saturday, Sunday or
holiday.
(l) Descriptive Headings; Interpretation; No Strict
Construction. The descriptive headings of this Agreement are inserted for
convenience only and do not constitute a substantive part of this Agreement.
Whenever required by the context, any pronoun used in this Agreement shall
include the corresponding masculine, feminine or neuter forms, and the singular
forms of nouns, pronouns, and verbs shall include the plural and vice versa.
Reference to any agreement, document, or instrument means such agreement,
document, or instrument as amended or otherwise modified from time to time in
accordance with the terms thereof, and if applicable hereof. The use of the
words "include" or "including" in this Agreement shall be by way of example
rather than by limitation. The use of the words "or," "either" or "any" shall
not be exclusive. The parties hereto have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the parties hereto, and no presumption or burden of
proof shall arise favoring or disfavoring any party by virtue of the authorship
of any of the provisions of this Agreement.
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<PAGE> 23
(m) Notices. All notices, demands or other
communications to be given or delivered under or by reason of the provisions of
this Agreement shall be in writing and shall be deemed to have been given when
(a) delivered personally to the recipient, (b) telecopied to the recipient
(with hard copy sent to the recipient by reputable overnight courier service
(charges prepaid) that same day) if telecopied before 5:00 p.m. Chicago,
Illinois time on a business day, and otherwise on the next business day, or (c)
one business day after being sent to the recipient by reputable overnight
courier service (charges prepaid). Such notices, demands and other
communications shall be sent to the following Persons at the following
addresses:
To the LLC:
c/oMadison Dearborn Capital Partners
Three First National Plaza, Suite 3800
Chicago, Illinois 60670
Attention: James N. Perry, Jr.
Telephone: (312) 732-5416
Telecopy: (312) 732-4098
with a copy (which shall not constitute notice) to:
Kirkland & Ellis
200 East Randolph Drive
Chicago, Illinois 60601
Attention: Mark B. Tresnowski, Esq.
Telephone: (312) 861-2385
Telecopy: (312) 861-2200
and a copy (which shall not constitute notice) to:
Swidler & Berlin
3000 K Street, N.W., Suite 300
Washington, D.C. 20007
Attention: John Klusaritz, Esq.
Telephone: (202) 424-7586
Telecopy: (202) 424-7643
To the Company:
15190 Prestonwood Boulevard
Suite 421
Dallas, Texas 75248
Attention: Royce J. Holland
Telephone: (972) 385-3176
Telecopy: (972) 385-3176
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<PAGE> 24
with a copy (which shall not constitute notice) to:
Kirkland & Ellis
200 East Randolph Drive
Chicago, Illinois 60601
Attention: Mark B. Tresnowski, Esq.
Telephone: (312) 861-2385
Telecopy: (312) 861-2200
and a copy (which shall not constitute notice) to:
Swidler & Berlin
3000 K Street, N.W., Suite 300
Washington, D.C. 20007
Attention: John Klusaritz, Esq.
Telephone: (202) 424-7586
Telecopy: (202) 424-7643
To an Executive Purchaser: at the address set forth in the
LLC's or the Company's records.
or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party.
(n) Delivery by Facsimile. This Agreement, the
agreements referred to herein, and each other agreement or instrument entered
into in connection herewith or therewith or contemplated hereby or thereby, and
any amendments hereto or thereto, to the extent signed and delivered by means
of a facsimile machine, shall be treated in all manner and respects as an
original agreement or instrument and shall be considered to have the same
binding legal effect as if it were the original signed version thereof
delivered in person. At the request of any party hereto or to any such
agreement or instrument, each other party hereto or thereto shall reexecute
original forms thereof and deliver them to all other parties. No party hereto
or to any such agreement or instrument shall raise the use of a facsimile
machine to deliver a signature or the fact that any signature or agreement or
instrument was transmitted or communicated through the use of a facsimile
machine as a defense to the formation or enforceability of a contract and each
such party forever waives any such defense.
* * * *
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<PAGE> 25
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on the date first written above.
TRANSCEND TELECOM, L.L.C.
By: /s/ THOMAS M. LORD
------------------------------
Its: Chief Financial Officer
------------------------------
TRANSCEND TELECOM, INC.
By: /s/ THOMAS M. LORD
---------------------------
Its: Chief Financial Officer
---------------------------
EXECUTIVE PURCHASERS
/s/ ROYCE J. HOLLAND
-----------------------------------
Royce J. Holland
Royce J. Holland Family Limited
Partnership
By: /s/ ROYCE J. HOLLAND
------------------------------
Royce J. Holland, its general
partner
<PAGE> 1
EXHIBIT 10.7
EXECUTIVE PURCHASE AGREEMENT
THIS EXECUTIVE PURCHASE AGREEMENT (this "Agreement") is made
as of January 28, 1998, by and between Allegiance Telecom, L.L.C., a Delaware
limited liability company (the "LLC"), Allegiance Telecom, Inc., a Delaware
corporation (the "Company"), and C. Daniel Yost ("Executive"). Capitalized terms
used but not otherwise defined herein have the meanings ascribed to such terms
in paragraph 7 hereof.
NOW, THEREFORE, in consideration of the mutual promises made
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto, intending to be legally
bound, agree as follows:
1. PURCHASE AND SALE OF EXECUTIVE SECURITIES.
(a) Initial Capital Contribution and Issuance of Executive
Securities. Upon execution of this Agreement, Executive shall make a capital
contribution to the LLC in the amount of $300,000 (the "Initial Capital
Contribution") in exchange for, and the LLC shall issue to Executive, 600,000
Class B Units having the rights, obligations, and preferences set forth with
respect thereto in the LLC Agreement. Executive shall make the Initial Capital
Contribution to the LLC by delivery to the LLC of a cashier's or certified
check, or wire transfer of immediately available funds to an account designated
by the LLC, in the aggregate amount equal to the Initial Capital Contribution.
The aggregate amount of the Initial Capital Contribution made with respect to
each Class B Unit issued hereunder shall be considered Basic Contributions made
with respect to such Class B Unit.
(b) Representations and Warranties of Executive. In connection
with the Initial Capital Contribution and the issuance of the Executive
Securities hereunder, Executive represents and warrants to each of the LLC and
the Company that:
(i) The Executive Securities to be acquired by
Executive pursuant to this Agreement shall be acquired for Executive's
own account and not with a view to, or intention of, distribution
thereof in violation of the Securities Act or any applicable state
securities laws, and the Executive Securities shall not be disposed of
in contravention of the Securities Act or any applicable state
securities laws.
(ii) Executive will serve on the Management Committee
of the LLC, is a management employee of the Company, is sophisticated
in financial matters and is able to evaluate the risks and benefits of
the investment in the Executive Securities.
(iii) Executive is able to bear the economic risk of
his investment in the Executive Securities for an indefinite period of
time and is aware that transfer of the Executive Securities may not be
possible because (A) such transfer is subject to contractual
restrictions on transfer set forth herein and in the Securityholders
Agreement, and (B) the
<PAGE> 2
Executive Securities have not been registered under the Securities Act
or any applicable state securities laws and, therefore, cannot be sold
unless subsequently registered under the Securities Act and such
applicable state securities laws or an exemption from such registration
is available.
(iv) Executive has had an opportunity to ask
questions and receive answers concerning the terms and conditions of
the offering of the Executive Securities issued hereunder and has had
full access to such other information concerning the Company as he has
requested.
(v) This Agreement, the Joinder and Rights Agreement,
the LLC Agreement, the Securityholders Agreement, the Registration
Agreement, and the other agreements contemplated thereby of even date
therewith constitute the legal, valid and binding obligations of
Executive, enforceable in accordance with their terms, and the
execution, delivery and performance of such agreements by Executive and
Executive's employment with the Company do not and shall not conflict
with, violate or cause a breach of any agreement, contract or
instrument to which Executive is a party or by which he is bound or any
judgment, order or decree to which Executive is subject.
(c) Acknowledgment of At-Will Employment. As an inducement to
the LLC and the Company to enter into this Agreement, and as a condition
thereto, Executive acknowledges and agrees that no agreement or arrangement
between the Executive and the Company or the LLC (including, without limitation,
the issuance of the Executive Securities to Executive and the execution and
delivery of this Agreement) shall entitle Executive to remain in the employment
of the Company and its Subsidiaries or affect the right of the Company or its
Subsidiaries to terminate Executive's employment at any time and for any reason.
Executive's initial annual salary, which will remain subject to changes
implemented by the Board of Directors of the Company, shall be $200,000.
2. VESTING OF EXECUTIVE SECURITIES.
(a) Vesting Schedule. Except as otherwise provided herein, an
amount of Unvested Securities (as defined below) shall vest on each of the first
four anniversaries of the date hereof, such that the Executive Securities shall
be vested on each such date in accordance with the following schedule:
<TABLE>
<CAPTION>
Cumulative Percentage of Executive
Date Securities Vested on Such Date
-------- ----------------------------------
<S> <C>
The date hereof 20%
The first anniversary of the date hereof 40%
The second anniversary of the date hereof 60%
The third anniversary of the date hereof 80%
The fourth anniversary of the date hereof 100%
</TABLE>
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<PAGE> 3
Notwithstanding the foregoing sentence, and except as otherwise provided herein,
the above vesting schedule shall cease and no Unvested Securities (as defined
below) shall vest after the date on which Executive's employment with the
Company and its Subsidiaries terminates for any reason; provided that if
Executive's employment is terminated by the Company without Cause, the Executive
Securities shall thereafter continue to vest in accordance with the above
schedule so long as Executive has not committed a Vesting Termination Breach
(upon which breach the vesting schedule shall cease, and no Unvested Securities
(as defined below) shall vest on or after the date of the first such breach). In
the event the LLC or the Company has alleged that Executive has committed a
Vesting Termination Breach, Executive disputes such allegation, and the matter
is subject to the dispute resolution provisions set forth in paragraph 6,
vesting shall be tolled upon the date of the allegation of such breach; provided
that (i) if it is ultimately resolved under paragraph 6 that Executive has
committed a Vesting Termination Breach, the tolling shall become a permanent
cessation such that vesting shall have forever ceased upon the date of such
allegation, and (ii) if it is ultimately resolved under paragraph 6 that
Executive did not commit a Vesting Termination Breach, a number of Unvested
Securities shall vest giving retroactive effect to such vesting schedule such
that there shall exist a number of Vested Securities as if the vesting schedule
had not been tolled as a result of such allegations. Executive Securities which
have become vested pursuant to this Agreement are referred to herein as "Vested
Securities," and all other Executive Securities are referred to herein as
"Unvested Securities."
(b) Acceleration upon a Qualified Sale of the Company. All
Unvested Securities shall become Vested Securities upon the consummation of a
Qualified Sale of the Company (as defined below) so long as Executive is
employed by the Company or any of its Subsidiaries on the date of such sale (or,
if Executive's employment was terminated by the Company without Cause, so long
as Executive has not committed a Vesting Termination Breach). A "Qualified Sale
of the Company" means either (i) the sale, lease, transfer, conveyance or other
disposition, in one or a series of related transactions, of all or substantially
all of the assets of the Company and its Subsidiaries, taken as a whole, or (ii)
a transaction or series of transactions (including by way of merger,
consolidation, or sale of stock, but not including a Public Offering) the result
of which is that the holders of the Company's outstanding voting stock
immediately prior to such transaction are after giving effect to such
transaction no longer, in the aggregate, the "beneficial owners" (as such term
is defined in Rule 13d-3 and Rule 13d-5 promulgated under the Securities
Exchange Act), directly or indirectly through one or more intermediaries, of
more than 50% of the voting power of the outstanding voting stock of the
Company, in each case where the consideration for such assets or stock in such
sale or transfer consists of cash and/or publicly traded equity securities for
at least 50% of the outstanding stock of the Company (e.g., 100% of such
consideration would have to consist of cash and/or publicly traded equity
securities if only 50.01% of such stock were sold in such transaction).
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<PAGE> 4
(c) Acceleration upon a Public Offering. Upon the consummation
of the Company's initial Public Offering, and so long as Executive is employed
by the Company or any of its Subsidiaries on the closing date of such offering
(or, if Executive's employment was terminated by the Company without Cause, so
long as Executive has not committed a Vesting Termination Breach), there will
vest the amount of Unvested Securities which were scheduled to vest within the
365 days following such closing date (and the remaining Unvested Securities, if
any, shall continue to vest 20% on each anniversary of the date hereof in
accordance with clause (a) above, such that the vesting schedule set forth in
paragraph (a) above shall have been effectively accelerated by one year).
(d) Acceleration upon Death or Disability. All Unvested Shares
shall become Vested Shares if Executive's employment with the Company or any of
its Subsidiaries terminates by reason of Executive's death or Disability.
(e) Other Acceleration. Subject to paragraph 3(h) hereof, any
Unvested Securities which the LLC (or its assignees) has not elected to
repurchase in the Repurchase Notice (as defined below) (including Unvested
Securities originally included in the Repurchase Notice, but for which the
election to repurchase was rescinded, pursuant to the terms of paragraph 3, by
all of the LLC and/or its assignees having made such election) shall thereafter
be deemed Vested Securities.
3. LLC'S REPURCHASE OPTION.
(a) The Repurchase Option. Upon (i) the termination of
Executive's employment with the Company and its Subsidiaries for any reason
other than a termination by the Company without Cause, or (ii) if Executive's
employment is terminated by the Company without Cause, upon Executive's
commission of a Vesting Termination Breach (the occurrence of either (i) or
(ii), a "Repurchase Event"), the Executive Securities then in existence (whether
held by Executive or one or more of Executive's transferees) will be subject to
repurchase by the LLC at the LLC's election pursuant to the terms and conditions
set forth in this paragraph 3 (the "Repurchase Option"). In the event that the
LLC or the Company has alleged that Executive has committed a Vesting
Termination Breach, Executive disputes such allegation, and the matter is
subject to the dispute resolution provisions set forth in paragraph 6, the
closing of the repurchase under this paragraph 3 shall not occur unless and
until it is ultimately determined that Executive committed a Vesting Termination
Breach; provided that during the pendency of such proceeding, the Executive
Securities specified in the Repurchase Notice (as defined below) shall not be
transferred by any holder thereof to any Person.
(b) Repurchase Price. The repurchase price (the "Repurchase
Price") for any Vested Securities to be repurchased shall be the Fair Market
Value of such securities. The Repurchase Price of any Unvested Securities to be
repurchased shall be the lesser of (x) the Fair Market Value of such Securities,
and (y) the Original Cost of such Securities (with securities having the lowest
Original Cost subject to repurchase prior to securities with a higher Original
Cost).
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<PAGE> 5
(c) Exercise of Repurchase Option. The LLC (by action of the
Board) may elect to purchase all or any portion of the Executive Securities by
delivering written notice (the "Repurchase Notice") to the holder or holders of
the Executive Securities within 30 days after the Repurchase Event. The
Repurchase Notice shall set forth the amount, type, and class of Executive
Securities (including, if applicable, the amount of Unvested Securities and/or
Vested Securities) to be acquired from each such holder. The Executive
Securities to be repurchased by the LLC shall first be satisfied to the extent
possible from the Executive Securities held by Executive at the time of delivery
of the Repurchase Notice. If the amount of Executive Securities then held by
Executive is less than the total amount of Executive Securities that the LLC has
elected to purchase, the LLC shall purchase the remaining securities elected to
be purchased from the other holder(s) of Executive Securities, pro rata
according to the amount of Executive Securities held of record by each such
other holder at the time of delivery of the Repurchase Notice. The amount of
Unvested Securities and Vested Securities to be repurchased hereunder shall be
deemed to be allocated among Executive and the other holders of repurchased
Executive Securities (if any) pro rata according to the amount of Executive
Securities to be purchased from such persons.
(d) Assignment by the LLC. The LLC, by action of the Board,
will have the right to assign all or any portion of its repurchase rights
hereunder to any holder of Investor Equity and/or to any executive employee of
the Company or any of its Subsidiaries. Notwithstanding the foregoing, the LLC
may not assign to any Person its right to pay a portion of the Repurchase Price
for Executive Securities repurchased hereunder in the form of Class C Units (or,
after the dissolution and liquidation of the LLC, a promissory note).
(e) Fair Market Value of Repurchased Shares.
(i) The "Fair Market Value" of Executive Securities
subject to repurchase hereunder shall be determined in accordance with
this paragraph (e).
(ii) A majority interest of the LLC and/or any
assignees of the LLC's repurchase rights (based on the amount of
Executive Securities to be purchased by each) and the holders of a
majority of the Executive Securities to be repurchased shall attempt in
good faith to agree on the Fair Market Value of the Executive
Securities. Any agreement reached by such Persons shall be final and
binding on all parties hereto.
(iii) If such Persons are unable to reach such
agreement within 20 days after the giving of Repurchase Notice, the
Fair Market Value of any Executive Securities that are publicly traded
shall be the average, over a period of 21 days consisting of the date
of the Repurchase Event and the 20 consecutive business days prior to
that date, of the average of the closing prices of the sales of such
securities on all securities exchanges on which such securities may at
that time be listed, or, if there have been no sales on any such
exchange on any day, the average of the highest bid and lowest asked
prices on all such exchanges at the end of such day, or, if on any day
such securities are not so listed, the average of the representative
bid and asked prices quoted in the Nasdaq System as of 4:00 P.M., New
York time, or, if on any day such securities are not quoted in the
Nasdaq System, the average of
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<PAGE> 6
the highest bid and lowest asked prices on such day in the domestic
over-the-counter market as reported by the National Quotation Bureau
Incorporated, or any similar successor organi zation.
(iv) If such Persons are unable to reach agreement
pursuant to subparagraph (ii) within 20 days after the giving of
Repurchase Notice, and to the extent any Executive Securities are not
publicly traded:
(A) A majority interest of the LLC and/or
its assignees (based on the amount of Executive Securities to be
repurchased by each) and the holders of a majority of the Executive
Securities shall each, within 10 days thereafter, choose one investment
banker or other appraiser with experience in analyzing and making
determinations concerning matters in the telecommunications industry
and in valuing entities like the LLC (including the distribution
arrangements of the type described in the LLC Agreement), and the two
investment bankers/appraisers so selected shall together select a third
investment banker/appraiser similarly qualified.
(B) The three investment bankers/appraisers
shall first appraise the fair market value of the Company (based on the
assumption of an orderly, arm's length sale to a willing unaffiliated
buyer). The three investment bankers/appraisers shall then appraise the
fair market value of such non-publicly-traded Executive Securities as
follows:
1) the fair market value of each
share of Common Stock shall be equal to the fair market value
of the Company divided by the total number of shares of Common
Stock outstanding on the date of the Repurchase Event
(determined on a fully diluted basis (x) with respect to the
Preferred Stock and all other outstanding securities
convertible into the Company's Common Stock, assuming the
conversion of such Preferred Stock and other convertible
securities (without regard to any conditions or other
restrictions on such conversion), and (y) with respect to all
outstanding options, warrants and other rights or securities
exercisable or exchangeable for shares of the Company's Common
Stock, in accordance with the Treasury Stock Method under
generally accepted accounting principles for determination of
fully diluted earnings per share);
2) the fair market value of each
share of Preferred Stock shall be equal to the greater of (x)
the Liquidation Value (as defined in the Company's certificate
of incorporation) of such share, together with all accrued but
unpaid dividends thereon (as determined under the Company's
certificate of incorporation), and (y) the fair market value
(determined in accordance with subparagraph 1) above) of the
share(s) of Common Stock (including fractional shares) into
which such share of Preferred Stock is convertible on the date
of the Repurchase Event;
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<PAGE> 7
3) the fair market value of each
Class B Unit shall be equal to the fair market value of the
assets (as determined in accordance with subparagraphs 1), 2),
and 4) of this subparagraph (B)) that would be distributed
according to the terms of the LLC Agreement with respect to
such Class B Unit if the LLC were dissolved and liquidated on
the date of the Repurchase Event; and
4) the fair market value of any
other non-publicly-traded Executive Securities (or, for
purposes of subparagraph 3) above, any other assets) shall be
the fair value of such securities (or other assets),
determined on the basis of an orderly, arm's length sale to a
willing, unaffiliated buyer, taking into account all relevant
factors determinative of value.
The three investment bankers/appraisers shall, within thirty days of
their retention, provide the written results of such appraisals to the
LLC and/or its assignees and to each of the holders of Executive
Securities.
(C) The "Fair Market Value" of the
non-publicly-traded Executive Securities to be repurchased shall be the
average of the two appraisals closest to each other, and such amount
shall be final and binding on all parties hereto; provided that the LLC
(and/or any assignee) may at any time within five days after receiving
written notice of such determination rescind its prior exercise of the
Repurchase Option by giving written notice of such revocation to the
holder or holders of the Executive Securities to be repurchased, and
upon such revocation the revoking party will be treated as if it had
never exercised such Repurchase Option (it being understood that such
revoking parties shall thereafter have no right to re-exercise such
Repurchase Option).
(D) The costs of such appraisal shall be
allocated between the parties based on the percentage which the portion
of the contested amount not awarded to each party bears to the amount
actually contested by such party; provided that if any parties revoke
their exercise of the Repurchase Option pursuant to paragraph (C)
above, such revoking parties shall bear (pro rata among such revoking
parties based on the number of Executive Securities with respect to
which each such revoking party had initially exercised its Repurchase
Option) any appraisal costs that would be allocated to the holder(s) of
Executive Securities under this paragraph (D).
(f) Closing of the Repurchase. Within 10 business days after
the Repurchase Price for the Executive Securities to be purchased has been
determined, the LLC shall send a notice to each holder of Executive Securities
setting forth the consideration to be paid for such shares and the time and
place for the closing of the transaction, which date shall not be more than 30
days nor less than five days after the delivery of such notice. At such closing,
the holders of Executive Securities shall deliver all certificates (if any
exist) evidencing the Executive Securities to be repurchased to the LLC (and/or
any assignees of the LLC's repurchase right), and the LLC (and/or any assignees)
shall pay for the Executive Securities to be purchased pursuant to the
Repurchase Option by delivery of a check or wire transfer of immediately
available funds in the aggregate
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<PAGE> 8
amount of the Repurchase Price for such securities; provided that in the event
the Board determines in its good faith discretion that the LLC is not in a
position to pay in cash any or all of the Repurchase Price for Executive
Securities to be repurchased by it:
(i) prior to the dissolution and liquidation of the
LLC, the LLC may pay a portion of the Repurchase Price for such
securities equal to (x) the aggregate Repurchase Price for the
Executive Securities to be repurchased by the LLC minus (y) the
Original Cost of such securities, by issuing in exchange for such
securities an equal number of the LLC's Class C Units (having the
rights and preferences set forth in the LLC Agreement), and for
purposes of the LLC Agreement each such Class C Unit shall as of its
issuance be deemed to have Basic Contributions made with respect to
such Class C Unit equal to (A) the aggregate portion of the Repurchase
Price paid by the issuance of Class C Units divided by (B) the number
of Class C Units so issued in such repurchase; or
(ii) after the dissolution and liquidation of the
LLC, the Company (as successor to the rights of the LLC under paragraph
8(e)(ii) below) may pay, in the form of a promissory note, a portion of
the Repurchase Price for such securities equal to (x) the aggregate
Repurchase Price for the Executive Securities to be repurchased by the
LLC minus (y) the Original Cost of such securities. Such a promissory
note shall be subordinated to all of the Company's senior debt
obligations either then or thereafter incurred, shall earn simple
annual interest at the Base Rate, shall have all principal and accrued
interest due and payable upon maturity, and shall mature upon the
earliest to occur of the Company's initial Public Offering (if such
initial Public Offering has not occurred prior to the issuance of such
promissory note), a Qualified Sale of the Company, or the fifth
anniversary of the issuance of such promissory note.
The purchasers of Executive Securities hereunder shall be entitled to receive
customary representations and warranties from the sellers regarding good title
to such shares, free and clear of any liens or encumbrances.
(g) Restrictions. Notwithstanding anything to the contrary
contained in this Agreement, all repurchases of Executive Securities by the LLC
shall be subject to applicable restrictions contained in the Delaware General
Corporation Law, the Delaware Limited Liability Company Act and in the LLC's and
its Subsidiaries' debt and equity financing agreements. If any such restrictions
prohibit the repurchase of Executive Securities hereunder which the LLC is
otherwise entitled or required to make, the time periods provided in this
paragraph 3 shall be suspended, and the LLC may make such repurchases as soon as
it is permitted to do so under such restrictions, unless by such time such
Repurchase Option has terminated pursuant to paragraph 3(h); provided that
notwithstanding the foregoing, in no event shall the time periods provided in
this paragraph 3 be suspended for more than 6 months.
(h) Termination of Repurchase Option. The rights under this
paragraph 3 of the LLC and/or its assignees to repurchase Vested Securities (but
not Unvested Securities) shall terminate upon the consummation of a Public
Offering. All rights under this paragraph 3 of the LLC
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<PAGE> 9
and/or its assignees to repurchase Executive Securities (including both Vested
Securities and Unvested Securities) shall terminate upon a Qualified Sale of the
Company.
4. RESTRICTIONS ON TRANSFER.
(a) Opinion of Valid Transfer. In addition to any other
restrictions on transfer imposed by this Agreement, the Securityholders
Agreement, or the LLC Agreement, no holder of Executive Securities may sell,
transfer or dispose of any Executive Securities (except pursuant to an effective
registration statement under the Securities Act) without first delivering to the
LLC an opinion of counsel (reasonably acceptable in form and substance to the
LLC) that neither registration nor qualification under the Securities Act and
applicable state securities laws is required in connection with such transfer.
(b) Restrictive Legend. The certificates representing
Executive Securities shall bear the following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ORIGINALLY ISSUED
ON JANUARY 28, 1998, HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE,
AND SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR AN EXEMPTION FROM
REGISTRATION THEREUNDER. THE SECURITIES REPRESENTED BY THIS CERTIFICATE
ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON TRANSFER AND REPURCHASE
OPTIONS SET FORTH IN AN EXECUTIVE PURCHASE AGREEMENT BETWEEN THE ISSUER
OF SUCH SECURITIES (THE "ISSUER") AND THE INITIAL HOLDER OF SUCH
SECURITIES (THE "INITIAL HOLDER"). A COPY OF SUCH AGREEMENT MAY BE
OBTAINED BY THE HOLDER HEREOF AT THE ISSUER'S PRINCIPAL PLACE OF
BUSINESS WITHOUT CHARGE."
The legend set forth above shall be removed from the certificates evidencing any
shares which cease to be Executive Securities.
(c) Retention of Executive Stock.
(i) Executive shall not sell, transfer, assign,
pledge or otherwise dispose of (whether with or without consideration
and whether voluntarily or involuntarily or by operation of law) any
interest in any Executive Securities (a "Transfer"), except pursuant to
(A) the repurchase provisions of paragraph 3 hereof or of the LLC
Agreement, (B) the "Participation Rights" or "Put" provisions set forth
in the Securityholders Agreement, or (C) a Sale of the Company (as
defined in the Securityholders Agreement) (each of (A), (B), and (C),
an "Exempt Transfer").
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<PAGE> 10
(ii) The restrictions contained in this paragraph (c)
shall not apply with respect to transfers of Executive Securities (A)
pursuant to applicable laws of descent and distribution or (B) among
Executive's Family Group; provided that the restrictions contained in
this paragraph shall continue to be applicable to the Executive
Securities after any such Transfer, the transferees of such Executive
Securities shall have agreed in writing to be bound by the provisions
of this Agreement with respect to the Executive Securities so
transferred, and (prior to the death of Executive) each such transferee
of Executive Securities shall have entered into proxies and other
agreements satisfactory to the holders of a majority of the Investor
Equity pursuant to which Executive shall have the sole right to vote
such Executive Securities for all purposes. For purposes of this
Agreement, "Family Group" means Executive's spouse and descendants
(whether natural or adopted), any trust which at the time of such
Transfer and at all times thereafter is and remains solely for the
benefit of Executive and/or Executive's spouse and/or descendants and
any family partnership the partners of which consist solely of
Executive, such spouse, such descendants or such trusts.
(iii) The restrictions on the transfer of Executive
Securities set forth in this paragraph (c) shall continue with respect
to each Executive Security following any Transfer thereof (other than
an Exempt Transfer); provided that upon the consummation of a Public
Offering the restrictions set forth in this paragraph (c) shall
thereafter cease to apply to all Vested Securities (it being understood
that such restrictions shall continue to apply to all Unvested
Securities until such time as they become Vested Securities in
accordance with the terms hereof).
5. ISSUANCE OF TIER I AND TIER II OPTIONS.
(a) In the event of a dissolution and liquidation of the LLC
upon the consummation of a Public Offering (a "Public Offering Liquidation"), if
the Management Percentage for such Public Offering Liquidation is less than
33.3% the Company shall contemporaneously with such liquidation issue to each
holder of Class B Units:
(i) options (the "Tier I Options") entitling the
holder to acquire, at an exercise price per share equal to the IPO
Price, a number of shares of the Company's Common Stock equal to the
lesser of (x) the number of shares of Common Stock that such holder
would have received under the LLC Agreement in connection with such
Public Offering Liquidation if the Management Percentage had been 10%,
and (y) the difference of (A) the number of shares of Common Stock that
such holder would have received in connection with such Public Offering
Liquidation if the Management Percentage had been 33.3%, minus (B) the
number of shares of Common Stock that such holder actually received in
such liquidation; and
(ii) if the Management Percentage for such Public
Offering Liquidation is less than 23.3%, in addition to any Tier I
Options, options (the "Tier II Options") entitling the holder to
acquire, at an exercise price per share equal to the Tier II Price, a
number of shares of the Company's Common Stock equal to the lesser of
(x) the number of shares of
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<PAGE> 11
Common Stock that such holder would have received in connection with
such Public Offering Liquidation if the Management Percentage had been
10%, and (y) the difference of (A) the number of shares of Common Stock
that such holder would have received in connection with such Public
Offering Liquidation if the Management Percentage had been 33.3%, minus
(B) the number of shares of Common Stock that such holder actually
received in such liquidation, minus (C) the number of shares of Common
Stock into which the Tier I Options issued to such holder are initially
exercisable.
(b) For purposes of performing the calculations in
subparagraphs (a)(i) and (ii) above, (i) a distribution of shares of the
Company's Preferred Stock in a Public Offering Liquidation shall be considered
to have been a distribution of the number of shares of Common Stock into which
such Preferred Stock is convertible on the date of such liquidation, and (ii) a
distribution of any other property in a Public Offering Liquidation shall be
considered to have been a distribution of a number of shares of Common Stock
equal to the quotient of (A) the aggregate fair market value of such distributed
property on the date of such liquidation, as determined in good faith by the
Board, divided by (B) the fair market value of one share of Common Stock on the
date of such liquidation, as determined in good faith by the Board.
(c) For purposes of this paragraph, the following terms shall
have the meanings set forth below:
"IPO Price" means the gross price per share at which shares of
the Company's Common Stock are initially offered and sold to the public in
connection with a Public Offering.
"Liquidation FMV" has the meaning ascribed to such term in the
LLC Agreement.
"Management Percentage" has the meaning ascribed to such term
in the LLC Agreement.
"Return Multiple" has the meaning ascribed to such term in the
LLC Agreement.
"Tier II Price" means, with respect to a particular Public
Offering Liquidation, the quotient of (x) the amount that would result in a
Return Multiple of 3.5 if the Liquidation FMV for such liquidation were equal to
such amount, divided by (y) the number of shares of Common Stock (determined on
an as-if-converted basis) held by the LLC immediately prior to such liquidation.
6. CONFIDENTIALITY.
(a) Nondisclosure and Nonuse of Confidential Information.
Executive shall not disclose or use at any time, either during his employment
with the Company or thereafter, any Confidential Information (as defined below)
of which Executive is or becomes aware, whether or not such information is
developed by him, except to the extent that such disclosure or use is directly
related to and required by Executive's performance of duties assigned to
Executive by the LLC or the Company, or to the extent such disclosure is
permissible under the confidentiality provisions set
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<PAGE> 12
forth in the Stock Purchase Agreement. Executive shall take all appropriate
steps to safeguard Confidential Information and to protect it against
disclosure, misuse, espionage, loss and theft. As used in this Agreement, the
term "Confidential Information" means information that is not generally known to
the public and that is used, developed or obtained by the LLC, the Company, or
its Subsidiaries in connection with their business, including but not limited to
(i) products or services, (ii) fees, costs and pricing structures, (iii)
designs, (iv) analysis, (v) drawings, photographs and reports, (vi) computer
software, including operating systems, applications and program listings, (vii)
flow charts, manuals and documentation, (viii) data bases, (ix) accounting and
business methods, (x) inventions, devices, new developments, methods and
processes, whether patentable or unpatentable and whether or not reduced to
practice, (xi) customers and clients and customer or client lists, (xii)
copyrightable works, (xiv) all technology and trade secrets, (xv) business plans
and financial models, and (xvi) all similar and related information in whatever
form. Confidential Information shall not include any information that has been
published in a form generally available to the public prior to the date
Executive proposes to disclose or use such information. Information shall not be
deemed to have been published merely because individual portions of the
information have been separately published, but only if all material features
constituting such information have been published in combination.
Notwithstanding the foregoing, "Confidential Information" shall not include any
information of which (a) Executive became aware prior to his affiliation with
the Company and the LLC, (b) Executive learns from sources other than the LLC,
the Company or its Subsidiaries, whether prior to or after such information is
actually disclosed by the LLC, the Company or its Subsidiaries or (c) is
disclosed in a prospectus or other documents for dissemination to the public.
(b) The Company's Ownership of Intellectual Property.
(i) Acknowledgment of Company Ownership. In the event
that Executive as part of his activities on behalf of the Company
generates, authors or contributes to any invention, design, new
development, device, product, method or process (whether or not
patentable or reduced to practice or constituting Confidential
Information), any copyrightable work (whether or not constituting
Confidential Information) or any other form of Confidential Information
relating directly or indirectly to the Company's business as now or
hereafter conducted (collectively, "Intellectual Property"), Executive
acknowledges that such Intellectual Property is the exclusive property
of the Company and hereby assigns all right, title and interest in and
to such Intellectual Property to the Company. Any copyrightable work
prepared in whole or in part by Executive will be deemed "a work made
for hire" under Section 201(b) of the 1976 Copyright Act, and the
Company shall own all of the rights comprised by the copyright therein.
Executive shall promptly and fully disclose all Intellectual Property
to the Company and shall cooperate with the Company to protect the
Company's interests in and rights to such Intellectual Property
(including, without limitation, providing reasonable assistance in
securing patent protection and copyright registrations and executing
all documents as reasonably requested by the Company, whether such
requests occur prior to or after termination of Executive's employment
with the Company).
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(ii) Executive Invention. Executive understands that
paragraph (b)(i) of this Agreement regarding the Company's ownership of
Intellectual Property does not apply to any invention for which no
equipment, supplies, facilities or trade secret information of the
Company were used and which was developed entirely on Executive's own
time, unless (i) the invention relates to the business of the Company
or to the Company's actual or demonstrably anticipated research or
development or (ii) the invention results from any work performed by
Executive for the Company.
(c) Delivery of Materials upon Termination of Employment. As
requested by the Company from time to time and upon the termination of
Executive's employment with the Company for any reason, Executive shall promptly
deliver to the Company all copies and embodiments, in whatever form, of all
Confidential Information and Intellectual Property in Executive's possession or
within his control (including, but not limited to, written records, notes,
photographs, manuals, notebooks, documentation, program listings, flow charts,
magnetic media, disks, diskettes, tapes and all other materials containing any
Confidential Information or Intellectual Property) irrespective of the location
or form of such material and, if requested by the Company, shall provide the
Company with written confirmation that all such materials have been delivered to
the Company.
(d) Noncompete. Executive acknowledges and agrees with the
Company and the LLC that in the course of his employment with the Company he
shall become familiar with the Company's trade secrets and with other
Confidential Information concerning the Company and the LLC, that Executive's
services to the Company and the LLC are unique in nature and of an extraordinary
value to the Company and the LLC, and that the Company and the LLC would be
irreparably damaged if Executive were to provide similar services to any person
or entity competing with the LLC or the Company or engaged in a similar
business. In connection with the issuance to Executive of the Executive
securities hereunder, in consideration of and as an inducement to the LLC's and
the Company's entering into this Agreement and the Company's agreeing to issue
the Tier I and Tier II Options and to assume the obligations of the LLC upon
dissolution and liquidation thereof, and in further consideration of the
Noncompete Compensation (as defined below), Executive accordingly covenants and
agrees with the Company and the LLC that during the Noncompete Period (as
defined below), Executive shall not, directly or indirectly, either for himself
or for or through any other individual, corporation, partnership, joint venture
or other entity, partici pate in any business or enterprise conducting business
in any Covered MSA which engages or proposes to engage in the provision of
telecommunications services. For purposes of this Agreement, (i) the term
"participate in" shall include, without limitation, having any direct or
indirect interest in any corporation, partnership, joint venture or other
entity, whether as a sole pro prietor, owner, stockholder, partner, joint
venturer, creditor or otherwise, or rendering any direct or indirect service or
assistance to any individual, corporation, partnership, joint venture and other
business entity (whether as a director, officer, manager, supervisor, employee,
agent, consultant or otherwise), other than ownership of up to 2% of the
outstanding stock of any class which is publicly traded, (ii) the term "MSA"
means metropolitan statistical area and (iii) the term "Covered MSA" means (1)
any MSA in which the Company is engaged in business or has at any time had an
Approved Business Plan (as defined in the Stock Purchase Agreement) to engage in
business, (2) the MSAs which include Dallas, New York, Atlanta, Chicago and Los
Angeles (the "Top Five MSAs"), (3) from and after the time
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at which there are Approved Business Plans for each of the Top Five MSAs, each
of the MSAs which include Boston, Cleveland, Denver, Detroit, Houston, Miami,
Northern New Jersey, Phoenix, Philadelphia, St. Louis, San Diego, San Francisco,
San Jose, Seattle and Washington, D.C. and (4) any other MSA for which a
business plan has been submitted to the Company pursuant to the Stock Purchase
Agreement on or prior to the termination of Executive's Employment or for which
Company personnel have taken substantial steps towards completing, provided,
that any such MSA under this clause (4) shall cease to be a Covered MSA if such
business plan does not become an Approved Business Plan within the earlier of
(x) 180 days after such submission and (y) 180 days after the termination of
Executive's Employment, and, in each case, the Company's management and the LLC
have attempted in good faith during such period to reach agreements that would
enable such plan to become an Approved Business Plan. Notwithstanding the
foregoing, the term Covered MSA shall not include any Top Five MSA which is not
subject to an Approved Business Plan if business plans for at least three of
such Top Five MSAs have not become Approved Business Plans prior to the later of
(x) the 180th day after the date on which the Company has employed a president
and chief operating officer approved by the Board's Executive Committee or (y)
the 180th day after business plans for each of the Top Five MSAs have been
submitted to the Company and the LLC for approval pursuant to the Stock Purchase
Agreement (which business plans are eligible to qualify as Approved Business
Plans because, among other things, they specify each of the items required under
Section 3A of the Stock Purchase Agreement to be specified in an Approved
Business Plan and do not require equity capital beyond the Maximum Commitment
(as defined in the Stock Purchase Agreement), and Executive has worked in good
faith to seek to have such plans become Approved Business Plans by such time.
Executive agrees that this covenant is reasonable with respect to its duration,
geographical area and scope.
(e) Nonsolicitation. During the Noncompete Period, Executive
shall not (i) induce or attempt to induce any employee of the Company or any
Subsidiary to leave the employ of the Company or any Subsidiary, or in any way
interfere with the relationship between the Company or any Subsidiary and any
employee thereof, (ii) hire directly or through another entity any person who
was an employee of the Company or any Subsidiary at any time during the six
months prior to the date such person is to be so hired, or (iii) induce or
attempt to induce any customer, supplier, licensee or other business relation of
the LLC, the Company or any Subsidiary to cease doing business with the LLC, the
Company or any Subsidiary, or in any way interfere with the relationship between
any such customer, supplier, licensee or business relation and the LLC, the
Company and its Subsidiaries (including, without limitation, making any negative
statements or communications concerning the LLC, the Company or any Subsidiary).
(f) Noncompete Period. The "Noncompete Period" shall commence
on the date hereof and shall continue until (i) if Executive is terminated prior
to the third anniversary of the date hereof, the later of (A) the fourth
anniversary of the date hereof and (B) the second anniversary of the date of
termination, (ii) if Executive is terminated on or after the third anniversary,
but prior to the fourth anniversary, of the date hereof, the fifth anniversary
of the date hereof, and (iii) if Executive is terminated on or after the fourth
anniversary hereof, the first anniversary of the date of termination; provided
that the Noncompete Period shall terminate if at any time after the date of
termination the Company ceases to pay Executive his Noncompete Compensation
(unless Executive
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<PAGE> 15
violates any covenant set forth in this paragraph 6, in which case the
Noncompete Period shall continue even absent payment of the Noncompete
Compensation). "Noncompete Compensation" shall consist of 100% of the base
salary that Executive received as compensation from the Company and its
Subsidiaries immediately prior to termination (Executive's "Previous Salary")
together with the continuation of the medical benefits that the Company provided
to Executive immediately prior to termination (Executive's "Previous Benefits");
provided that if at any time during the Noncompete Period Executive obtains
other employment, Executive's Noncompete Compensation shall during the period of
such employment (i) be reduced (but not below zero) by Executive's compensation
for such employment and (ii) shall not include the continued provision of
medical benefits if such employment provides medical benefits comparable to the
Previous Benefits.
(g) Judicial Modification. If the final judgment of a court of
competent jurisdiction, or any final non-appealable decision of an arbitrator in
connection with a mandatory arbitration, declares that any term or provision of
this paragraph is invalid or unenforceable, the parties agree that the court
making the determination of invalidity or unenforceability shall have the power
to reduce the scope, duration, or geographic area of the term or provision, to
delete specific words or phrases, or to replace any invalid or unenforceable
term or provision with a term or provision that is valid and enforceable and
that comes closest to expressing the intention of the invalid or unenforceable
term or provision, and this Agreement shall be enforceable as so modified after
the expiration of the time within which the judgment or decision may be
appealed.
(h) Dispute Resolution.
(i) Arbitration. All claims, disputes, controversies
and other matters in question arising out of or relating to this
paragraph 6, or to the alleged breach hereof, shall be settled by
preliminary negotiation between the LLC or other Person bringing such
allegation and the Executive (the "parties") or, if such preliminary
negotiation is unsuccessful for any reason (but in any event not later
than 10 days after commencement of such negotiation), by binding
arbitration in accordance with the procedures set forth in this
paragraph (h). Without limiting the mandatory arbitration provision set
forth in this paragraph (h), each of the parties hereto (A) waives the
right to bring an action in any court of competent jurisdiction with
respect to any such claims, controversies and disputes (other than any
such action to enforce the award or other remedy resulting from any
arbitration pursuant to this paragraph (h) or to prevent any arbitrator
from exceeding the authority granted to the arbitrators hereunder) and
(B) waives the right to trial by jury in any suit, action or other
proceeding brought on, with respect to or in connection with this
Agreement.
(ii) Binding Arbitration. Upon filing of a notice of
demand for binding arbitration by any party hereto, arbitration shall
be commenced and conducted as follows:
(A) Arbitrators. All claims, disputes,
controversies and other matters (collectively "matters") in
question shall be referred to and decided and settled by a
panel of three arbitrators with experience in analyzing,
understanding,
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and making determinations concerning matters in the
telecommunications industry, one selected by each of the
parties and the third by the two arbitrators so selected.
(B) Cost of Arbitration. The cost of each
arbitration proceeding, including without limitation the
arbitrators' compensation and expenses, hearing room charges,
court reporter transcript charges, etc., shall be allocated
among the parties based upon the percentage which the portion
of the contested amount not awarded to each party bears to the
amount actually contested by such party. The arbitrators shall
also award the party that prevails substantially in its
pre-hearing position its reasonable attorneys' fees and costs
incurred in connection with the arbitration. The arbitrators
are specifically instructed to award attorneys' fees for
instances of abuse of the discovery process.
(C) Situs of Proceedings. The situs of the
arbitration shall be in New York, New York, or such other
place as is mutually agreeable to the parties.
(iii) Pre-hearing Discovery. The parties shall have
the right to conduct and enforce pre-hearing discovery in accordance
with the then current Federal Rules of Civil Procedure, subject to the
following limitations: (A) each party may serve no more than one set of
interrogatories which set shall ask no more than twenty questions; (B)
each party may depose the other party's expert witnesses who will be
called to testify at the hearing, plus up to six fact witnesses without
regard to whether they will be called to testify (each party will be
entitled to a total of not more than 24 hours of depositions of the
other party's witnesses, and not more than 6 hours with respect to any
single witness); and (C) document discovery and other discovery shall
be under the control of and enforceable by the arbitrators, and all
disputes relating thereto shall be decided by the arbitrators.
Notwithstanding any contrary foregoing provisions, the arbitrators
shall have the power and authority to, and to the fullest extent
practicable shall, abbreviate arbitration discovery in a manner which
is fair to all parties in order to expedite the conclusion of each
alternative dispute resolution proceeding.
(iv) Pre-hearing Conference. Within thirty (30) days
after filing of notice of demand for binding arbitration, the
arbitrators shall hold a pre-hearing conference to establish schedules
for completion of discovery, for exchange of exhibit and witness lists,
for arbitration briefs, for the hearing, and to decide procedural
matters and all other questions that may be presented.
(v) Hearing Procedures. The hearing shall be
conducted to preserve its privacy and to allow reasonable procedural
due process. Rules of evidence need not be strictly followed, and the
hearing shall be streamlined as follows: (A) documents shall be
self-authenticating, subject to valid objection by the opposing party;
(B) expert reports, witness biographies, depositions and affidavits may
be utilized, subject to the opponent's right of a live
cross-examination of the witness in person; (C) charts, graphs and
summaries shall be utilized to present voluminous data, provided (1)
that the underlying data was made available to the opposing party
thirty (30) days prior to the hearing, and (2) that the preparer of
each chart, graph or summary is available for explanation and live
cross-examination in
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<PAGE> 17
person; (D) the hearing should be held on consecutive business days
without interruption to the maximum extent practicable; and (E) the
arbitrators shall establish all other procedural rules for the conduct
of the arbitration in accordance with the rules of arbitration of the
American Arbitration Association.
(vi) Governing Law. This arbitration provision shall
be governed by, and all rights and obligations specifically enforceable
under and pursuant to, the Federal Arbitration Act (9 U.S.C. ss. 1, et
seq.).
(vii) Consolidation. No arbitration shall include, by
consolidation, joinder or in any other manner, any additional person
not a party to this Agreement (other than affiliates of any such party,
which affiliates may be included in the arbitration), except by written
consent of the parties hereto containing a specific reference to this
Agreement.
(viii) Award; Time Limit. The arbitrators are
empowered to render an award of general compensatory damages and
equitable relief (including, without limitation, injunctive relief),
but is not empowered to award punitive damages. The award rendered by
the arbitrators (A) shall be final; (B) shall not constitute a basis
for collateral estoppel as to any issue; and (C) shall not be subject
to vacation or modification. The arbitrators shall render any award or
otherwise conclude the arbitration no later than 120 days after the
date notice is given pursuant to this paragraph (h).
(ix) Confidentiality. The parties hereto will
maintain the substance of any proceedings hereunder in confidence and
the arbitrators, prior to any proceedings hereunder, will sign an
agreement whereby the arbitrator agrees to keep the substance of any
proceedings hereunder in confidence.
7. DEFINITIONS.
"Approved Business Plan" has the meaning ascribed to such term
in the Stock Purchase Agreement.
"Basic Contributions" has the meaning ascribed to such term in
the LLC Agreement.
"Board" means the board of managers of the LLC (or, after the
dissolution and liquidation of the LLC, the board of directors of the Company).
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"Cause" means (A) Executive's theft or embezzlement, or
attempted theft or embezzlement, of money or property of the Company or the LLC,
Executive's perpetration or attempted perpetration of fraud, or Executive's
participation in a fraud or attempted fraud, on the Company or the LLC, or
Executive's unauthorized appropriation of, or attempt to misappropriate, any
tangible or intangible assets or property of the Company or the LLC, (B) any act
or acts of disloyalty, misconduct or moral turpitude by Executive injurious to
the interest, property, operations, business or reputation of the Company or the
LLC, or Executive's conviction of a crime the commission of which results in
injury to the Company or the LLC or (C) Executive's repeated refusal or failure
(other than by reason of Disability) to carry out reasonable instructions by his
superiors or the Board or the Company's board of directors.
"Class A Units" has the meaning ascribed to such term in the
LLC Agreement.
"Class B Units" has the meaning ascribed to such term in the
LLC Agreement.
"Class C Units" has the meaning ascribed to such term in the
LLC Agreement.
"Class D Units" has the meaning ascribed to such term in the
LLC Agreement.
"Common Stock" means the Company's Common Stock, par value
$.01 per share.
"Disability" means (i) any permanent physical or mental
incapacity or disability rendering the Executive unable or unfit to perform
effectively the duties and obligations of his employment or to participate
effectively and actively in the management of the Company, or (ii) any illness,
accident, injury, physical or mental incapacity or other disability, where such
condition has rendered the Executive unable or unfit to perform effectively the
duties and obligations of his employment or to participate effectively and
actively in the management of the Company for a period of at least 90 days (in
either case, as determined in the good faith judgment of the Company's board of
directors).
"Executive Securities" means (i) the Class B Units issued to
Executive hereunder, (ii) upon dissolution and liquidation of the LLC, any
securities of the Company distributed in respect of the securities referred to
in clause (i) above pursuant to such dissolution and liquidation, (iii) any Tier
I Options or Tier II Options issued to Executive hereunder, (iv) any other
securities of the LLC or the Company hereafter acquired by Executive, and (v)
any securities issued directly or indirectly with respect to the foregoing
securities by way of a stock split, stock dividend, or other division of
securities, or in connection with a combination of securities, recapitalization,
merger, consolidation, or other reorganization, or upon conversion or exercise
of any of the foregoing securities. As to any particular securities constituting
Executive Securities, such securities shall cease to be Executive Securities
when they have been (a) effectively registered under the Securities Act and
disposed of in accordance with the registration statement covering them, (b)
distributed to the public through a broker, dealer or market maker pursuant to
Rule 144 under the Securities Act (or any similar provision then in force) or
(c) repurchased by any holder of Class A Units, or by the LLC (including in
exchange for Class C Units or Class D Units), the Company or any Subsidiary
thereof
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<PAGE> 19
"Investor Equity" means (i) the Class A Units issued pursuant
to the Investor Purchase Agreement, (ii) upon and after the dissolution or
liquidation of the LLC, the securities distributed in respect of the securities
referred to in clause (i) above pursuant to such dissolution or liquidation, and
(iii) any securities issued directly or indirectly with respect to the foregoing
securities by way of a stock split, stock dividend, or other division of
securities, or in connection with a combination of securities, recapitalization,
merger, consolidation, or other reorganization, or upon conversion or exercise
of the foregoing (but not including any Class D Units issued in exchange for
Class A Units). As to any particular securities constituting Investor Equity,
such securities shall cease to be Investor Equity when they have been (a)
effectively registered under the Securities Act and disposed of in accordance
with the registration statement covering them, (b) distributed to the public
through a broker, dealer or market maker pursuant to Rule 144 under the
Securities Act (or any similar provision then in force) or (c) repurchased by
the LLC (including in exchange for Class D Units) or the Company or any
Subsidiary thereof.
"Joinder and Rights Agreement" means the joinder and rights
agreement of even date herewith, entered into by and among Executive, the LLC,
and the Company, as amended from time to time in accordance with its terms, by
which Executive became a party to the LLC Agreement, the Securityholders
Agreement, and the Registration Agreement.
"LLC Agreement" means the limited liability company agreement
dated as of August 13, 1997, entered into by and among the members of the LLC,
as amended from time to time in accordance with its terms.
"MSA" means a metropolitan statistical area.
"Original Cost" means, at any given time, (i) with respect to
any Class B Units, the total Basic Contributions made with respect to such Class
B Units pursuant to the LLC Agreement prior to such time, (ii) with respect to
any Preferred Stock, the aggregate Liquidation Value (as determined under the
Company's certificate of incorporation) of such Preferred Stock at such time,
(iii) with respect to any Common Stock issued upon conversion of Preferred
Stock, the Original Cost of such Preferred Stock, and (iv) with respect to any
other securities, the original price paid upon issuance of such securities.
"Person" means an individual, a partnership, a corporation, a
limited liability company, an association, a joint stock company, a trust, a
joint venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
"Preferred Stock" means the Company's 12% Cumulative
Convertible Preferred Stock, par value $.01 per share.
"Public Offering" means any underwritten sale of the Company's
common stock pursuant to an effective registration statement under the
Securities Act filed with the Securities and Exchange Commission on Form S-1 (or
a successor form adopted by the Securities and Exchange Commission); provided
that the following shall not be considered a Public Offering: (i) any issuance
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<PAGE> 20
of common stock as consideration or financing for a merger or acquisition, and
(ii) any issuance of common stock or rights to acquire common stock to employees
of the Company or its Subsidiaries as part of an incentive or compensation plan.
"Registration Agreement" means the registration rights
agreement dated as of August 13, 1997, entered into by and among the Company and
the holders of interests in the LLC, as amended from time to time in accordance
with its terms.
"Securities Act" means the Securities Act of 1933, as amended,
or any similar federal law then in force.
"Securityholders Agreement" means the securityholders
agreement dated as of August 13, 1997, entered into by and among the Company,
the LLC, and the holders of interests in the LLC, as amended from time to time
in accordance with its terms.
"Stock Purchase Agreement" means the stock purchase agreement
dated as of August 13, 1997, entered into by and between the Company and the
LLC, as amended from time to time in accordance with the terms thereof.
"Subsidiary" means, with respect to any Person, any
corporation, limited liability company, partnership, association or other
business entity of which (i) if a corporation, a majority of the total voting
power of shares of stock entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees thereof
is at the time owned or controlled, directly or indirectly, by that Person or
one or more of the other Subsidiaries of that Person or a combination thereof,
or (ii) if a limited liability company, partnership, association or other
business entity, a majority of the partnership or other similar ownership
interest thereof is at the time owned or controlled, directly or indirectly, by
any Person or one or more Subsidiaries of that Person or a combination thereof.
For purposes hereof, a Person or Persons shall be deemed to have a majority
ownership interest in a limited liability company, partnership, association or
other business entity if such Person or Persons shall be allocated a majority of
limited liability company, partnership, association or other business entity
gains or losses or shall be or control any managing director or general partner
of such limited liability company, partnership, association or other business
entity.
"Vesting Termination Breach" means (i) any breach of paragraph
6(d) or clause (ii) of paragraph 6(e) and (ii) any breach of any other provision
of paragraph 6 which is material or is intentionally and knowingly committed by
Executive.
8. MISCELLANEOUS PROVISIONS.
(a) Transfers in Violation of Agreement. Any Transfer or
attempted Transfer of any Executive Securities in violation of any provision of
this Agreement shall be void, and none of the LLC, the Company, or any
Subsidiary thereof shall record such purported Transfer on its books
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<PAGE> 21
or treat any purported transferee of such Executive Securities as the owner of
such securities for any purpose.
(b) Severability. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
any other provision or any other jurisdiction, but this Agreement shall be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
(c) Complete Agreement. This Agreement, those documents
expressly referred to herein and other documents of even date herewith embody
the complete agreement and understanding among the parties and supersede and
preempt any prior understandings, agreements or representations by or among the
parties, written or oral, which may have related to the subject matter hereof in
any way.
(d) Counterparts. This Agreement may be executed in separate
counterparts, none of which need contain the signature of more than one party
hereto but each of which shall be deemed to be an original and all of which
taken together shall constitute one and the same agreement.
(e) Successors and Assigns.
(i) Except as otherwise provided herein, this
Agreement shall bind the parties hereto and their respective successors
and assigns and shall inure to the benefit of and be enforceable by the
parties hereto and their respective successors and assigns whether so
expressed or not.
(ii) Each of the Company, the LLC, the Executive, and
each holder of Executive Securities hereby acknowledges that upon and
after the dissolution and liquidation of the LLC, (A) all contractual
obligations and duties of the LLC hereunder shall thereafter bind and
be enforceable against the Company, (B) all rights and powers granted
to the LLC hereunder (including, without limitation, the repurchase
rights set forth in paragraph 3) shall inure to the benefit of and be
enforceable by the Company, (C) all references to the LLC shall
thereafter be deemed to be references to the Company, and (D) this
Agreement shall thereafter operate and be construed as if the word
"Company" were substituted for the word "LLC" in each such instance.
(f) CHOICE OF LAW. ALL QUESTIONS CONCERNING THE CONSTRUCTION,
VALIDITY, ENFORCEMENT AND INTERPRETATION OF THIS AGREEMENT AND THE EXHIBITS
HERETO SHALL BE GOVERNED BY THE INTERNAL LAW, AND NOT THE LAW OF CONFLICTS, OF
THE STATE OF DELAWARE.
(g) Remedies. Each of the parties to this Agreement (including
any holder of Investor Equity or employee of the Company to which the LLC
assigns any of its repurchase rights
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<PAGE> 22
under paragraph 3 hereof) shall be entitled to enforce its rights under this
Agreement specifically, to recover damages and costs (including reasonable
attorney's fees) caused by any breach of any provision of this Agreement and to
exercise all other rights existing in its favor. The parties hereto agree and
acknowledge that money damages would not be an adequate remedy for any breach of
the provisions of this Agreement and that any party may in its sole discretion
apply to any court of law or equity of competent jurisdiction (without posting
any bond or deposit) for specific performance and/or other injunctive relief in
order to enforce or prevent any violations of the provisions of this Agreement.
(h) Amendment, Modification, or Waiver. The provisions of this
Agreement may be amended, modified, or waived only with the prior written
consent of the LLC and the Executive.
(i) Third-Party Beneficiaries. The parties hereto acknowledge
and agree that certain provisions of this Agreement are intended for the benefit
of certain holders of Investor Equity or employees of the Company to which the
LLC assigns any of its repurchase rights under paragraph 3 hereof, that such
Persons are third-party beneficiaries of this Agreement and that provisions of
this Agreement shall be enforceable by such Persons as provided herein.
(j) Business Days. If any time period for giving notice or
taking action hereunder expires on a day which is a Saturday, Sunday or legal
holiday in the State of Illinois, the time period shall be automatically
extended to the business day immediately following such Saturday, Sunday or
holiday.
(k) Descriptive Headings; Interpretation; No Strict
Construction. The descriptive headings of this Agreement are inserted for
convenience only and do not constitute a substantive part of this Agreement.
Whenever required by the context, any pronoun used in this Agreement shall
include the corresponding masculine, feminine or neuter forms, and the singular
forms of nouns, pronouns, and verbs shall include the plural and vice versa.
Reference to any agreement, document, or instrument means such agreement,
document, or instrument as amended or otherwise modified from time to time in
accordance with the terms thereof, and if applicable hereof. The use of the
words "include" or "including" in this Agreement shall be by way of example
rather than by limitation. The use of the words "or," "either" or "any" shall
not be exclusive. The parties hereto have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the parties hereto, and no presumption or burden of
proof shall arise favoring or disfavoring any party by virtue of the authorship
of any of the provisions of this Agreement.
(l) Notices. All notices, demands or other communications to
be given or delivered under or by reason of the provisions of this Agreement
shall be in writing and shall be deemed to have been given when (a) delivered
personally to the recipient, (b) telecopied to the recipient (with hard copy
sent to the recipient by reputable overnight courier service (charges prepaid)
that same day) if telecopied before 5:00 p.m. Chicago, Illinois time on a
business day, and otherwise on the next business day, or (c) one business day
after being sent to the recipient by
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reputable overnight courier service (charges prepaid). Such notices, demands and
other communications shall be sent to the following Persons at the following
addresses:
To the LLC:
c/o Madison Dearborn Capital Partners
Three First National Plaza
Suite 3800
Chicago, Illinois 60602
Attention: James N. Perry, Jr.
Telephone: (312) 895-1220
Telecopy: (312) 895-1001
with a copy (which shall not constitute notice) to:
Kirkland & Ellis
200 East Randolph Drive
Chicago, Illinois 60601
Attention: Mark B. Tresnowski, Esq.
Telephone: (312) 861-2385
Telecopy: (312) 861-2200
To the Company:
1950 Stemmons Freeway
Suite 3026
Dallas, Texas 75207
Attention: Royce J. Holland
Telephone: (214) 853-7100
Telecopy: (214) 853-7110
with a copy (which shall not constitute notice) to:
Kirkland & Ellis
200 East Randolph Drive
Chicago, Illinois 60601
Attention: Mark B. Tresnowski, Esq.
Telephone: (312) 861-2385
Telecopy: (312) 861-2200
To Executive: at the address set forth in the LLC's or the
Company's records.
or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party.
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(m) Certain Other Matters. In the event that Executive is
required to include for U.S. federal income tax purposes any amounts as ordinary
compensation income as a direct result of his purchase of the Executive
Securities hereunder, the Company shall take such actions (including, without
limitation, loaning and/or paying to Executive such amounts) as shall be
determined in good faith by the Board in order to place Executive in the same
after-tax economic position with respect to Executive's purchase and ultimate
disposition of the Executive Securities as if such amounts had not been included
in Executive's ordinary income and had not been added to Executive's tax basis
in the Executive Securities (taking into account the effect of any deductions
with respect to such ordinary compensation income that are allocated by the LLC
to Executive).
(n) Delivery by Facsimile. This Agreement, the agreements
referred to herein, and each other agreement or instrument entered into in
connection herewith or therewith or contemplated hereby or thereby, and any
amendments hereto or thereto, to the extent signed and delivered by means of a
facsimile machine, shall be treated in all manner and respects as an original
agreement or instrument and shall be considered to have the same binding legal
effect as if it were the original signed version thereof delivered in person. At
the request of any party hereto or to any such agreement or instrument, each
other party hereto or thereto shall reexecute original forms thereof and deliver
them to all other parties. No party hereto or to any such agreement or
instrument shall raise the use of a facsimile machine to deliver a signature or
the fact that any signature or agreement or instrument was transmitted or
communicated through the use of a facsimile machine as a defense to the
formation or enforceability of a contract and each such party forever waives any
such defense.
* * * *
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<PAGE> 25
IN WITNESS WHEREOF, the parties hereto have executed this
Executive Purchase Agreement on the date first written above.
ALLEGIANCE TELECOM, L.L.C.
By: /s/ ROYCE J. HOLLAND
------------------------------------------
Royce J. Holland, its authorized member
ALLEGIANCE TELECOM, INC.
By: /s/ ROYCE J. HOLLAND
------------------------------------------
Royce J. Holland, its Chairman and CEO
EXECUTIVE
/s/ C. DANIEL YOST
---------------------------------------------
Name: C. Daniel Yost
<PAGE> 1
EXHIBIT 10.8
AMENDED AND RESTATED
EXECUTIVE PURCHASE AGREEMENT
THIS AMENDED AND RESTATED EXECUTIVE PURCHASE AGREEMENT
(this "Agreement") is made as of January 20, 1998, by and between Allegiance
Telecom, L.L.C., a Delaware limited liability company (the "LLC"), Allegiance
Telecom, Inc., a Delaware corporation (the "Company"), and ______________
("Executive"). Capitalized terms used but not otherwise defined herein have the
meanings ascribed to such terms in paragraph 7 hereof.
The LLC, the Company, and Executive are parties to an
Executive Purchase Agreement dated as of August 13, 1997 (the "Prior
Agreement"), pursuant to which Executive made capital contributions to the LLC
in the amount of $7,705 (the "Initial Capital Contribution") in exchange for,
and the LLC issued to Executive, 150,000 Class B Units. The parties desire for
Executive to make capital contributions to the LLC in the amount of an
additional $6,563 (the "Second Initial Capital Contribution") in exchange for
the LLC's issuance to Executive of an additional 9,375 Class B Units. In
furtherance thereof, the parties hereby agree to amend and restate the Prior
Agreement as set forth herein.
NOW, THEREFORE, in consideration of the mutual promises made
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto, intending to be legally
bound, agree as follows:
1. PURCHASE AND SALE OF EXECUTIVE SECURITIES.
(a) Initial Capital Contribution and Issuance of Executive
Securities. Pursuant to the Prior Agreement, on August 13, 1997 (the "Prior
Date"), Executive made the Initial Capital Contribution to the LLC in exchange
for, and the LLC issued to Executive, 150,000 Class B Units having the rights,
obligations, and preferences set forth with respect thereto in the LLC
Agreement. The aggregate amount of the Initial Capital Contribution made with
respect to each such Class B Unit issued pursuant to the Prior Agreement is and
shall be considered Basic Contributions made with respect to such Class B Unit.
(b) Second Initial Capital Contribution and Issuance of
Executive Securities. Upon execution of this Agreement, Executive shall make the
Second Initial Capital Contribution to the LLC in exchange for, and the LLC
shall issue to Executive, an additional 9,375 Class B Units having the rights,
obligations, and preferences set forth with respect thereto in the LLC
Agreement. Executive shall make the Second Initial Capital Contribution to the
LLC by delivery to the LLC of a cashier's or certified check, or wire transfer
of immediately available funds to an account designated by the LLC, in the
aggregate amount equal to the Second Initial Capital Contribution. An aggregate
amount of the Second Initial Capital Contribution equal to $4,687.50 shall be
considered Basic Contributions made with respect to the 9,375 Class B Units
issued hereunder (which Basic Contributions shall be deemed to have been made
among such Class B Units on a pro rata basis).
<PAGE> 2
(c) Construction of Other Agreements. The parties hereto
acknowledge and agree that, pursuant to the express terms of the Stock Purchase
Agreement, the LLC Agreement, the Securityholders Agreement, and the
Registration Agreement, this Agreement (like the Prior Agreement) is and shall
be considered an "Executive Purchase Agreement" as such term is used in such
agreements.
(d) Representations and Warranties of Executive. In connection
with the Initial Capital Contribution and the Second Initial Capital
Contribution and the issuance of the Executive Securities under the Prior
Agreement and hereunder, Executive represents and warrants to each of the LLC
and the Company that:
(i) The Executive Securities acquired by Executive
under the Prior Agreement and to be acquired by Executive pursuant to
this Agreement shall be acquired for Executive's own account and not
with a view to, or intention of, distribution thereof in violation of
the Securities Act or any applicable state securities laws, and the
Executive Securities shall not be disposed of in contravention of the
Securities Act or any applicable state securities laws.
(ii) Executive will serve on the Management
Committee of the LLC, is a management employee of the Company, is
sophisticated in financial matters and is able to evaluate the risks
and benefits of the investment in the Executive Securities.
(iii) Executive is able to bear the economic risk of
his investment in the Executive Securities for an indefinite period of
time and is aware that transfer of the Executive Securities may not be
possible because (A) such transfer is subject to contractual
restrictions on transfer set forth herein and in the Securityholders
Agreement, and (B) the Executive Securities have not been registered
under the Securities Act or any applicable state securities laws and,
therefore, cannot be sold unless subsequently registered under the
Securities Act and such applicable state securities laws or an
exemption from such registration is available.
(iv) Executive has had an opportunity to ask
questions and receive answers concerning the terms and conditions of
the offering of the Executive Securities issued hereunder and has had
full access to such other information concerning the Company as he has
requested.
(v) This Agreement, the LLC Agreement, the
Securityholders Agreement, and the other agreements contemplated
thereby of even date therewith constitute the legal, valid and binding
obligations of Executive, enforceable in accordance with their terms,
and the execution, delivery and performance of such agreements by
Executive and Executive's employment with the Company do not and shall
not conflict with, violate or cause a breach of any agreement, contract
or instrument to which Executive is a party or by which he is bound or
any judgment, order or decree to which Executive is subject.
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<PAGE> 3
(e) Acknowledgment of At-Will Employment. As an inducement to
the LLC and the Company to enter into this Agreement, and as a condition
thereto, Executive acknowledges and agrees that no agreement or arrangement
between the Executive and the Company or the LLC (including, without limitation,
the issuance of the Executive Securities to Executive and the execution and
delivery of this Agreement) shall entitle Executive to remain in the employment
of the Company and its Subsidiaries or affect the right of the Company or its
Subsidiaries to terminate Executive's employment at any time and for any reason.
2. VESTING OF EXECUTIVE SECURITIES.
(a) Vesting Schedule. Except as otherwise provided herein, an
amount of Unvested Securities (as defined below) shall vest on each of the first
four anniversaries of the Prior Date, such that the Executive Securities shall
be vested on each such date in accordance with the following schedule:
<TABLE>
<CAPTION>
Cumulative Percentage of Executive
Date Securities Vested on Such Date
- ---------------------------------------- -----------------------------------
<S> <C>
The first anniversary of the Prior Date 25%
The second anniversary of the Prior Date 50%
The third anniversary of the Prior Date 75%
The fourth anniversary of the Prior Date 100%
</TABLE>
Notwithstanding the foregoing sentence, and except as otherwise provided herein,
the above vesting schedule shall cease and no Unvested Securities (as defined
below) shall vest after the date on which Executive's employment with the
Company and its Subsidiaries terminates for any reason. Executive Securities
which have become vested pursuant to this Agreement are referred to herein as
"Vested Securities," and all other Executive Securities are referred to herein
as "Unvested Securities."
(b) Acceleration upon a Qualified Sale of the Company. All
Unvested Securities shall become Vested Securities upon the consummation of a
Qualified Sale of the Company (as defined below) so long as Executive is
employed by the Company or any of its Subsidiaries on the date of such sale. A
"Qualified Sale of the Company" means either (i) the sale, lease, transfer,
conveyance or other disposition, in one or a series of related transactions, of
all or substantially all of the assets of the Company and its Subsidiaries,
taken as a whole, or (ii) a transaction or series of transactions (including by
way of merger, consolidation, or sale of stock, but not including a Public
Offering) the result of which is that the holders of the Company's outstanding
voting stock immediately prior to such transaction are after giving effect to
such transaction no longer, in the aggregate, the "beneficial owners" (as such
term is defined in Rule 13d-3 and Rule 13d-5 promulgated under the Securities
Exchange Act), directly or indirectly through one or more intermediaries, of
more than 50% of the voting power of the outstanding voting stock of the
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<PAGE> 4
Company, in each case where the consideration for such assets or stock in such
sale or transfer consists of cash and/or publicly traded equity securities for
at least 50% of the outstanding stock of the Company (e.g., 100% of such
consideration would have to consist of cash and/or publicly traded equity
securities if only 50.01% of such stock were sold in such transaction).
(c) Acceleration upon a Public Offering. Upon the consummation
of the Company's initial Public Offering, and so long as Executive is employed
by the Company or any of its Subsidiaries on the closing date of such offering,
there will vest the amount of Unvested Securities which were scheduled to vest
within the 365 days following such closing date (and the remaining Unvested
Securities, if any, shall continue to vest 25% on each anniversary of the Prior
Date in accordance with clause (a) above, such that the vesting schedule set
forth in paragraph (a) above shall have been effectively accelerated by one
year).
(d) Acceleration upon Death or Disability. All Unvested Shares
shall become Vested Shares if Executive's employment with the Company or any of
its Subsidiaries terminates by reason of Executive's death or Disability.
(e) Other Acceleration. Subject to paragraph 3(g) hereof, any
Unvested Securities which the LLC (or its assignees) has not elected to
repurchase in the Repurchase Notice (as defined below) (including Unvested
Securities originally included in the Repurchase Notice, but for which the
election to repurchase was rescinded, pursuant to the terms of paragraph 3, by
all of the LLC and/or its assignees having made such election) shall thereafter
be deemed Vested Securities.
3. LLC'S REPURCHASE OPTION.
(a) The Repurchase Option. Upon the termination of Executive's
employment with the Company and its Subsidiaries for any reason (a "Repurchase
Event"), the Executive Securities then in existence (whether held by Executive
or one or more of Executive's transferees) will be subject to repurchase by the
LLC at the LLC's election pursuant to the terms and conditions set forth in this
paragraph 3 (the "Repurchase Option").
(b) Repurchase Price. The repurchase price (the "Repurchase
Price") for any Vested Securities to be repurchased shall be the Fair Market
Value of such securities. The Repurchase Price of any Unvested Securities to be
repurchased shall be the lesser of (x) the Fair Market Value of such Securities,
and (y) the Original Cost of such Securities (with securities having the lowest
Original Cost subject to repurchase prior to securities with a higher Original
Cost).
(c) Exercise of Repurchase Option. The LLC (by action of the
Board) may elect to purchase all or any portion of the Executive Securities by
delivering written notice (the "Repurchase Notice") to the holder or holders of
the Executive Securities within 30 days after the Repurchase Event. The
Repurchase Notice shall set forth the amount, type, and class of Executive
Securities (including, if applicable, the amount of Unvested Securities and/or
Vested Securities) to be acquired from each such holder. The Executive
Securities to be repurchased by the LLC shall
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<PAGE> 5
first be satisfied to the extent possible from the Executive Securities held by
Executive at the time of delivery of the Repurchase Notice. If the amount of
Executive Securities then held by Executive is less than the total amount of
Executive Securities that the LLC has elected to purchase, the LLC shall
purchase the remaining securities elected to be purchased from the other
holder(s) of Executive Securities, pro rata according to the amount of Executive
Securities held of record by each such other holder at the time of delivery of
the Repurchase Notice. The amount of Unvested Securities and Vested Securities
to be repurchased hereunder shall be deemed to be allocated among Executive and
the other holders of repurchased Executive Securities (if any) pro rata
according to the amount of Executive Securities to be purchased from such
persons.
(d) Assignment by the LLC. The LLC, by action of the Board,
will have the right to assign all or any portion of its repurchase rights
hereunder to any holder of Investor Equity and/or to any executive employee of
the Company or any of its Subsidiaries. Notwithstanding the foregoing, the LLC
may not assign to any Person its right to pay a portion of the Repurchase Price
for Executive Securities repurchased hereunder in the form of Class C Units (or,
after the dissolution and liquidation of the LLC, a promissory note).
(e) Fair Market Value of Repurchased Shares.
(i) The "Fair Market Value" of Executive Securities
subject to repurchase hereunder shall be determined in accordance with
this paragraph (e).
(ii) A majority interest of the LLC and/or any
assignees of the LLC's repurchase rights (based on the amount of
Executive Securities to be purchased by each) and the holders of a
majority of the Executive Securities to be repurchased shall attempt in
good faith to agree on the Fair Market Value of the Executive
Securities. Any agreement reached by such Persons shall be final and
binding on all parties hereto.
(iii) If such Persons are unable to reach such
agreement within 20 days after the giving of Repurchase Notice, the
Fair Market Value of any Executive Securities that are publicly traded
shall be the average, over a period of 21 days consisting of the date
of the Repurchase Event and the 20 consecutive business days prior to
that date, of the average of the closing prices of the sales of such
securities on all securities exchanges on which such securities may at
that time be listed, or, if there have been no sales on any such
exchange on any day, the average of the highest bid and lowest asked
prices on all such exchanges at the end of such day, or, if on any day
such securities are not so listed, the average of the representative
bid and asked prices quoted in the Nasdaq System as of 4:00 P.M., New
York time, or, if on any day such securities are not quoted in the
Nasdaq System, the average of the highest bid and lowest asked prices
on such day in the domestic over-the-counter market as reported by the
National Quotation Bureau Incorporated, or any similar successor
organization.
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<PAGE> 6
(iv) If such Persons are unable to reach agreement
pursuant to subparagraph (ii) within 20 days after the giving of
Repurchase Notice, and to the extent any Executive Securities are not
publicly traded:
(A) A majority interest of the LLC
and/or its assignees (based on the amount of Executive Securities to
be repurchased by each) and the holders of a majority of the Executive
Securities shall each, within 10 days thereafter, choose one
investment banker or other appraiser with experience in analyzing and
making determinations concerning matters in the telecommunications
industry and in valuing entities like the LLC (including the
distribution arrangements of the type described in the LLC Agreement),
and the two investment bankers/appraisers so selected shall together
select a third investment banker/appraiser similarly qualified.
(B) The three investment bankers/appraisers
shall first appraise the fair market value of the Company (based on
the assumption of an orderly, arm's length sale to a willing
unaffiliated buyer). The three investment bankers/appraisers shall
then appraise the fair market value of such non-publicly-traded
Executive Securities as follows:
1) the fair market value of
each share of Common Stock shall be equal to the fair market
value of the Company divided by the total number of shares
of Common Stock outstanding on the date of the Repurchase
Event (determined on a fully diluted basis (x) with respect
to the Preferred Stock and all other outstanding securities
convertible into the Company's Common Stock, assuming the
conversion of such Preferred Stock and other convertible
securities (without regard to any conditions or other
restrictions on such conversion), and (y) with respect to
all outstanding options, warrants and other rights or
securities exercisable or exchangeable for shares of the
Company's Common Stock, in accordance with the Treasury
Stock Method under generally accepted accounting principles
for determination of fully diluted earnings per share);
2) the fair market value of
each share of Preferred Stock shall be equal to the greater
of (x) the Liquidation Value (as defined in the Company's
certificate of incorporation) of such share, together with
all accrued but unpaid dividends thereon (as determined
under the Company's certificate of incorporation), and (y)
the fair market value (determined in accordance with
subparagraph 1) above) of the share(s) of Common Stock
(including fractional shares) into which such share of
Preferred Stock is convertible on the date of the Repurchase
Event;
3) the fair market value of
each Class B Unit shall be equal to the fair market value of
the assets (as determined in accordance with subparagraphs
1), 2), and 4) of this subparagraph (B)) that would be
distributed
- 6 -
<PAGE> 7
according to the terms of the LLC Agreement with respect to
such Class B Unit if the LLC were dissolved and liquidated on
the date of the Repurchase Event; and
4) the fair market value of
any other non-publicly-traded Executive Securities (or, for
purposes of subparagraph 3) above, any other assets) shall
be the fair value of such securities (or other assets),
determined on the basis of an orderly, arm's length sale to
a willing, unaffiliated buyer, taking into account all
relevant factors determinative of value.
The three investment bankers/appraisers shall, within thirty days of
their retention, provide the written results of such appraisals to the
LLC and/or its assignees and to each of the holders of Executive
Securities.
(C) The "Fair Market Value" of the
non-publicly-traded Executive Securities to be repurchased shall be
the average of the two appraisals closest to each other, and such
amount shall be final and binding on all parties hereto; provided that
the LLC (and/or any assignee) may at any time within five days after
receiving written notice of such determination rescind its prior
exercise of the Repurchase Option by giving written notice of such
revocation to the holder or holders of the Executive Securities to be
repurchased, and upon such revocation the revoking party will be
treated as if it had never exercised such Repurchase Option (it being
understood that such revoking parties shall thereafter have no right
to re-exercise such Repurchase Option).
(D) The costs of such appraisal shall be
allocated between the parties based on the percentage which the portion
of the contested amount not awarded to each party bears to the amount
actually contested by such party; provided that if any parties revoke
their exercise of the Repurchase Option pursuant to paragraph (C)
above, such revoking parties shall bear (pro rata among such revoking
parties based on the number of Executive Securities with respect to
which each such revoking party had initially exercised its Repurchase
Option) any appraisal costs that would be allocated to the holder(s)
of Executive Securities under this paragraph (D).
(f) Closing of the Repurchase. Within 10 business days after
the Repurchase Price for the Executive Stock to be repurchased has been
determined, the LLC shall send a notice to each holder of Executive Stock
setting forth the consideration to be paid for such shares and the time and
place for the closing of the transaction, which date shall not be more than 30
days nor less than five days after the delivery of such notice. At such closing,
the holders of Executive Securities shall deliver all certificates (if any
exist) evidencing the Executive Securities to be repurchased to the LLC (and/or
any assignees of the LLC's repurchase right), and the LLC (and/or any assignees)
shall pay for the Executive Securities to be purchased pursuant to the
Repurchase Option by delivery of a check or wire transfer of immediately
available funds in the aggregate amount of the Repurchase Price for such
securities; provided that in the event the Board determines in its good faith
discretion
- 7 -
<PAGE> 8
that the LLC is not in a position to pay in cash any or all of the Repurchase
Price for Executive Securities to be repurchased by it:
(i) prior to the dissolution and liquidation of the
LLC, the LLC may pay a portion of the Repurchase Price for such
securities equal to (x) the aggregate Repurchase Price for the
Executive Securities to be repurchased by the LLC minus (y) the
Original Cost of such securities, by issuing in exchange for such
securities an equal number of the LLC's Class C Units (having the
rights and preferences set forth in the LLC Agreement), and for
purposes of the LLC Agreement each such Class C Unit shall as of its
issuance be deemed to have Basic Contributions made with respect to
such Class C Unit equal to (A) the aggregate portion of the Repurchase
Price paid by the issuance of Class C Units divided by (B) the number
of Class C Units so issued in such repurchase; or
(ii) after the dissolution and liquidation of the
LLC, the Company (as successor to the rights of the LLC under paragraph
8(e)(ii) below) may pay, in the form of a promissory note, a portion of
the Repurchase Price for such securities equal to (x) the aggregate
Repurchase Price for the Executive Securities to be repurchased by the
LLC minus (y) the Original Cost of such securities. Such a promissory
note shall be subordinated to all of the Company's senior debt
obligations either then or thereafter incurred, shall earn simple
annual interest at the Base Rate, shall have all principal and accrued
interest due and payable upon maturity, and shall mature upon the
earliest to occur of the Company's initial Public Offering (if such
initial Public Offering has not occurred prior to the issuance of such
promissory note), a Qualified Sale of the Company, or the fifth
anniversary of the issuance of such promissory note.
The purchasers of Executive Securities hereunder shall be entitled to receive
customary representations and warranties from the sellers regarding good title
to such shares, free and clear of any liens or encumbrances.
(g) Restrictions. Notwithstanding anything to the contrary
contained in this Agreement, all repurchases of Executive Securities by the LLC
shall be subject to applicable restrictions contained in the Delaware General
Corporation Law, the Delaware Limited Liability Company Act and in the LLC's and
its Subsidiaries' debt and equity financing agreements. If any such restrictions
prohibit the repurchase of Executive Securities hereunder which the LLC is
otherwise entitled or required to make, the time periods provided in this
paragraph 3 shall be suspended, and the LLC may make such repurchases as soon as
it is permitted to do so under such restrictions, unless by such time such
Repurchase Option has terminated pursuant to paragraph 3(h); provided that
notwithstanding the foregoing, in no event shall the time periods provided in
this paragraph 3 be suspended for more than 6 months.
(h) Termination of Repurchase Option. The rights under this
paragraph 3 of the LLC and/or its assignees to repurchase Vested Securities (but
not Unvested Securities) shall terminate upon the consummation of a Public
Offering. All rights under this paragraph 3 of the LLC
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<PAGE> 9
and/or its assignees to repurchase Executive Securities (including both Vested
Securities and Unvested Securities) shall terminate upon a Qualified Sale of the
Company.
4. RESTRICTIONS ON TRANSFER.
(a) Opinion of Valid Transfer. In addition to any other
restrictions on transfer imposed by this Agreement, the Securityholders
Agreement, or the LLC Agreement, no holder of Executive Securities may sell,
transfer or dispose of any Executive Securities (except pursuant to an effective
registration statement under the Securities Act) without first delivering to the
LLC an opinion of counsel (reasonably acceptable in form and substance to the
LLC) that neither registration nor qualification under the Securities Act and
applicable state securities laws is required in connection with such transfer.
(b) Restrictive Legend. The certificates representing
Executive Securities shall bear the following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR
THE SECURITIES LAWS OF ANY STATE, AND SUCH SECURITIES MAY NOT BE SOLD
OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE ACT OR AN EXEMPTION FROM REGISTRATION THEREUNDER. THE
SECURITIES REPRESENTED BY THIS CERTIFICATE ARE ALSO SUBJECT TO
ADDITIONAL RESTRICTIONS ON TRANSFER AND REPURCHASE OPTIONS SET FORTH IN
AN EXECUTIVE PURCHASE AGREEMENT BETWEEN THE ISSUER OF SUCH SECURITIES
(THE "ISSUER") AND THE INITIAL HOLDER OF SUCH SECURITIES (THE "INITIAL
HOLDER"), AS AMENDED FROM TIME TO TIME. A COPY OF SUCH AGREEMENT MAY BE
OBTAINED BY THE HOLDER HEREOF AT THE ISSUER'S PRINCIPAL PLACE OF
BUSINESS WITHOUT CHARGE."
The legend set forth above shall be removed from the certificates evidencing any
shares which cease to be Executive Securities.
(c) Retention of Executive Stock.
(i) Executive shall not sell, transfer, assign,
pledge or otherwise dispose of (whether with or without consideration
and whether voluntarily or involuntarily or by operation of law) any
interest in any Executive Securities (a "Transfer"), except pursuant to
(A) the repurchase provisions of paragraph 3 hereof or of the LLC
Agreement, (B) the "Participation Rights" or "Put" provisions set forth
in the Securityholders Agreement, or (C) a Sale of the Company (as
defined in the Securityholders Agreement) (each of (A), (B), and (C),
an "Exempt Transfer").
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<PAGE> 10
(ii) The restrictions contained in this paragraph (c)
shall not apply with respect to transfers of Executive Securities (A)
pursuant to applicable laws of descent and distribution or (B) among
Executive's Family Group; provided that the restrictions contained in
this paragraph shall continue to be applicable to the Executive
Securities after any such Transfer, the transferees of such Executive
Securities shall have agreed in writing to be bound by the provisions
of this Agreement with respect to the Executive Securities so
transferred, and (prior to the death of Executive) each such transferee
of Executive Securities shall have entered into proxies and other
agreements satisfactory to the holders of a majority of the Investor
Equity pursuant to which Executive shall have the sole right to vote
such Executive Securities for all purposes. For purposes of this
Agreement, "Family Group" means Executive's spouse and descendants
(whether natural or adopted), any trust which at the time of such
Transfer and at all times thereafter is and remains solely for the
benefit of Executive and/or Executive's spouse and/or descendants and
any family partnership the partners of which consist solely of
Executive, such spouse, such descendants or such trusts.
(iii) The restrictions on the transfer of Executive
Securities set forth in this paragraph (c) shall continue with respect
to each Executive Security following any Transfer thereof (other than
an Exempt Transfer); provided that upon the consummation of a Public
Offering the restrictions set forth in this paragraph (c) shall
thereafter cease to apply to all Vested Securities (it being understood
that such restrictions shall continue to apply to all Unvested
Securities until such time as they become Vested Securities in
accordance with the terms hereof).
5. ISSUANCE OF TIER I AND TIER II OPTIONS.
(a) In the event of a dissolution and liquidation of the LLC
upon the consummation of a Public Offering (a "Public Offering Liquidation"), if
the Management Percentage for such Public Offering Liquidation is less than
33.3% the Company shall contemporaneously with such liquidation issue to each
holder of Class B Units:
(i) options (the "Tier I Options") entitling the
holder to acquire, at an exercise price per share equal to the IPO
Price, a number of shares of the Company's Common Stock equal to the
lesser of (x) the number of shares of Common Stock that such holder
would have received under the LLC Agreement in connection with such
Public Offering Liquidation if the Management Percentage had been 10%,
and (y) the difference of (A) the number of shares of Common Stock that
such holder would have received in connection with such Public Offering
Liquidation if the Management Percentage had been 33.3%, minus (B) the
number of shares of Common Stock that such holder actually received in
such liquidation; and
(ii) if the Management Percentage for such Public
Offering Liquidation is less than 23.3%, in addition to any Tier I
Options, options (the "Tier II Options") entitling the holder to
acquire, at an exercise price per share equal to the Tier II Price, a
number of
- 10 -
<PAGE> 11
shares of the Company's Common Stock equal to the lesser of (x) the
number of shares of Common Stock that such holder would have received
in connection with such Public Offering Liquidation if the Management
Percentage had been 10%, and (y) the difference of (A) the number of
shares of Common Stock that such holder would have received in
connection with such Public Offering Liquidation if the Management
Percentage had been 33.3%, minus (B) the number of shares of Common
Stock that such holder actually received in such liquidation, minus (C)
the number of shares of Common Stock into which the Tier I Options
issued to such holder are initially exercisable.
(b) For purposes of performing the calculations in
subparagraphs (a)(i) and (ii) above, (i) a distribution of shares of the
Company's Preferred Stock in a Public Offering Liquidation shall be considered
to have been a distribution of the number of shares of Common Stock into which
such Preferred Stock is convertible on the date of such liquidation, and (ii) a
distribution of any other property in a Public Offering Liquidation shall be
considered to have been a distribution of a number of shares of Common Stock
equal to the quotient of (A) the aggregate fair market value of such distributed
property on the date of such liquidation, as determined in good faith by the
Board, divided by (B) the fair market value of one share of Common Stock on the
date of such liquidation, as determined in good faith by the Board.
(c) For purposes of this paragraph, the following terms shall
have the meanings set forth below:
"IPO Price" means the gross price per share at which shares of
the Company's Common Stock are initially offered and sold to the public in
connection with a Public Offering.
"Liquidation FMV" has the meaning ascribed to such term in the
LLC Agreement.
"Management Percentage" has the meaning ascribed to such term
in the LLC Agreement.
"Return Multiple" has the meaning ascribed to such term in the
LLC Agreement.
"Tier II Price" means, with respect to a particular Public
Offering Liquidation, the quotient of (x) the amount that would result in a
Return Multiple of 3.5 if the Liquidation FMV for such liquidation were equal to
such amount, divided by (y) the number of shares of Common Stock (determined on
an as-if-converted basis) held by the LLC immediately prior to such liquidation.
6. CONFIDENTIALITY.
(a) Nondisclosure and Nonuse of Confidential Information.
Executive shall not disclose or use at any time, either during his employment
with the Company or thereafter, any Confidential Information (as defined below)
of which Executive is or becomes aware, whether or not such information is
developed by him, except to the extent that such disclosure or use is directly
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<PAGE> 12
related to and required by Executive's performance of duties assigned to
Executive by the LLC or the Company, or to the extent such disclosure is
permissible under the confidentiality provisions set forth in the Stock Purchase
Agreement. Executive shall take all appropriate steps to safeguard Confidential
Information and to protect it against disclosure, misuse, espionage, loss and
theft. As used in this Agreement, the term "Confidential Information" means
information that is not generally known to the public and that is used,
developed or obtained by the LLC, the Company, or its Subsidiaries in connection
with their business, including but not limited to (i) products or services, (ii)
fees, costs and pricing structures, (iii) designs, (iv) analysis, (v) drawings,
photographs and reports, (vi) computer software, including operating systems,
applications and program listings, (vii) flow charts, manuals and documentation,
(viii) data bases, (ix) accounting and business methods, (x) inventions,
devices, new developments, methods and processes, whether patentable or
unpatentable and whether or not reduced to practice, (xi) customers and clients
and customer or client lists, (xii) copyrightable works, (xiv) all technology
and trade secrets, (xv) business plans and financial models, and (xvi) all
similar and related information in whatever form. Confidential Information shall
not include any information that has been published in a form generally
available to the public prior to the date Executive proposes to disclose or use
such information. Information shall not be deemed to have been published merely
because individual portions of the information have been separately published,
but only if all material features constituting such information have been
published in combination. Notwithstanding the foregoing, "Confidential
Information" shall not include any information of which (a) Executive became
aware prior to his affiliation with the Company and the LLC, (b) Executive
learns from sources other than the LLC, the Company or its Subsidiaries, whether
prior to or after such information is actually disclosed by the LLC, the Company
or its Subsidiaries or (c) is disclosed in a prospectus or other documents for
dissemination to the public.
(b) The Company's Ownership of Intellectual Property.
(i) Acknowledgment of Company Ownership. In the event
that Executive as part of his activities on behalf of the Company
generates, authors or contributes to any invention, design, new
development, device, product, method or process (whether or not
patentable or reduced to practice or constituting Confidential
Information), any copyrightable work (whether or not constituting
Confidential Information) or any other form of Confidential Information
relating directly or indirectly to the Company's business as now or
hereafter conducted (collectively, "Intellectual Property"), Executive
acknowledges that such Intellectual Property is the exclusive property
of the Company and hereby assigns all right, title and interest in and
to such Intellectual Property to the Company. Any copyrightable work
prepared in whole or in part by Executive will be deemed "a work made
for hire" under Section 201(b) of the 1976 Copyright Act, and the
Company shall own all of the rights comprised by the copyright therein.
Executive shall promptly and fully disclose all Intellec tual Property
to the Company and shall cooperate with the Company to protect the
Company's interests in and rights to such Intellectual Property
(including, without limitation, providing reasonable assistance in
securing patent protection and copyright registrations and
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<PAGE> 13
executing all documents as reasonably requested by the Company, whether
such requests occur prior to or after termination of Executive's
employment with the Company).
(ii) Executive Invention. Executive understands that
paragraph (b)(i) of this Agreement regarding the Company's ownership of
Intellectual Property does not apply to any invention for which no
equipment, supplies, facilities or trade secret information of the
Company were used and which was developed entirely on Executive's own
time, unless (i) the invention relates to the business of the Company
or to the Company's actual or demonstrably anticipated research or
development or (ii) the invention results from any work performed by
Executive for the Company.
(c) Delivery of Materials upon Termination of Employment. As
requested by the Company from time to time and upon the termination of
Executive's employment with the Company for any reason, Executive shall promptly
deliver to the Company all copies and embodiments, in whatever form, of all
Confidential Information and Intellectual Property in Executive's possession or
within his control (including, but not limited to, written records, notes,
photographs, manuals, notebooks, documentation, program listings, flow charts,
magnetic media, disks, diskettes, tapes and all other materials containing any
Confidential Information or Intellectual Property) irrespective of the location
or form of such material and, if requested by the Company, shall provide the
Company with written confirmation that all such materials have been delivered to
the Company.
7. DEFINITIONS.
"Basic Contributions" has the meaning ascribed to such term in
the LLC Agreement.
"Board" means the board of managers of the LLC (or, after the
dissolution and liquidation of the LLC, the board of directors of the Company).
"Cause" means (A) Executive's theft or embezzlement, or
attempted theft or embezzlement, of money or property of the Company or the LLC,
Executive's perpetration or attempted perpetration of fraud, or Executive's
participation in a fraud or attempted fraud, on the Company or the LLC, or
Executive's unauthorized appropriation of, or attempt to misappropriate, any
tangible or intangible assets or property of the Company or the LLC, (B) any act
or acts of disloyalty, misconduct or moral turpitude by Executive injurious to
the interest, property, operations, business or reputation of the Company or the
LLC, or Executive's conviction of a crime the commission of which results in
injury to the Company or the LLC or (C) Executive's repeated refusal or failure
(other than by reason of Disability) to carry out reasonable instructions by his
superiors or the Board or the Company's board of directors.
"Class A Units" has the meaning ascribed to such term in the
LLC Agreement.
"Class B Units" has the meaning ascribed to such term in the
LLC Agreement.
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<PAGE> 14
"Class C Units" has the meaning ascribed to such term in the
LLC Agreement.
"Class D Units" has the meaning ascribed to such term in the
LLC Agreement.
"Common Stock" means the Company's Common Stock, par value
$.01 per share.
"Disability" means (i) any permanent physical or mental
incapacity or disability rendering the Executive unable or unfit to perform
effectively the duties and obligations of his employment or to participate
effectively and actively in the management of the Company, or (ii) any illness,
accident, injury, physical or mental incapacity or other disability, where such
condition has rendered the Executive unable or unfit to perform effectively the
duties and obligations of his employment or to participate effectively and
actively in the management of the Company for a period of at least 90 days (in
either case, as determined in the good faith judgment of the Company's board of
directors).
"Executive Securities" means (i) the Class B Units issued to
Executive under the Prior Agreement and hereunder, (ii) upon dissolution and
liquidation of the LLC, any securities of the Company distributed in respect of
the securities referred to in clause (i) above pursuant to such dissolution and
liquidation, (iii) any Tier I Options or Tier II Options issued to Executive
hereunder, (iv) any other securities of the LLC or the Company acquired by
Executive at any time after the Prior Date, and (v) any securities issued
directly or indirectly with respect to the foregoing securities by way of a
stock split, stock dividend, or other division of securities, or in connection
with a combination of securities, recapitalization, merger, consolidation, or
other reorganization, or upon conversion or exercise of any of the foregoing
securities. As to any particular securities constituting Executive Securities,
such securities shall cease to be Executive Securities when they have been (a)
effectively registered under the Securities Act and disposed of in accordance
with the registration statement covering them, (b) distributed to the public
through a broker, dealer or market maker pursuant to Rule 144 under the
Securities Act (or any similar provision then in force) or (c) repurchased by
any holder of Class A Units, or by the LLC (including in exchange for Class C
Units or Class D Units), the Company or any Subsidiary thereof
"Investor Equity" means (i) the Class A Units issued pursuant
to the Investor Purchase Agreement, (ii) upon and after the dissolution or
liquidation of the LLC, the securities distributed in respect of the securities
referred to in clause (i) above pursuant to such dissolution or liquidation, and
(iii) any securities issued directly or indirectly with respect to the foregoing
securities by way of a stock split, stock dividend, or other division of
securities, or in connection with a combination of securities, recapitalization,
merger, consolidation, or other reorganization, or upon conversion or exercise
of the foregoing (but not including any Class D Units issued in exchange for
Class A Units). As to any particular securities constituting Investor Equity,
such securities shall cease to be Investor Equity when they have been (a)
effectively registered under the Securities Act and disposed of in accordance
with the registration statement covering them, (b) distributed to the public
through a broker, dealer or market maker pursuant to Rule 144 under the
Securities Act (or any similar
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<PAGE> 15
provision then in force) or (c) repurchased by the LLC (including in exchange
for Class D Units) or the Company or any Subsidiary thereof.
"LLC Agreement" means the limited liability company agreement
dated as of August 13, 1997, entered into by and among the members of the LLC,
as amended from time to time in accordance with its terms.
"Original Cost" means, at any given time, (i) with respect to
any Class B Units, the total Basic Contributions made with respect to such Class
B Units pursuant to the LLC Agreement prior to such time, (ii) with respect to
any Preferred Stock, the aggregate Liquidation Value (as determined under the
Company's certificate of incorporation) of such Preferred Stock at such time,
(iii) with respect to any Common Stock issued upon conversion of Preferred
Stock, the Original Cost of such Preferred Stock, and (iv) with respect to any
other securities, the original price paid upon issuance of such securities.
"Person" means an individual, a partnership, a corporation, a
limited liability company, an association, a joint stock company, a trust, a
joint venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
"Preferred Stock" means the Company's 12% Cumulative
Convertible Preferred Stock, par value $.01 per share.
"Public Offering" means any underwritten sale of the Company's
common stock pursuant to an effective registration statement under the
Securities Act filed with the Securities and Exchange Commission on Form S-1 (or
a successor form adopted by the Securities and Exchange Commission); provided
that the following shall not be considered a Public Offering: (i) any issuance
of common stock as consideration or financing for a merger or acquisition, and
(ii) any issuance of common stock or rights to acquire common stock to employees
of the Company or its Subsidiaries as part of an incentive or compensation plan.
"Registration Agreement" means the registration agreement
dated as of August 13, 1997, entered into by and among the Company and the
holders of interests in the LLC, as amended from time to time in accordance with
its terms.
"Securities Act" means the Securities Act of 1933, as amended,
or any similar federal law then in force.
"Securityholders Agreement" means the securityholders
agreement dated as of August 13, 1997, entered into by and among the Company,
the LLC, and the holders of interests in the LLC, as amended from time to time
in accordance with its terms.
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<PAGE> 16
"Stock Purchase Agreement" means the stock purchase agreement
dated as of August 13, 1997, entered into by and between the Company and the
LLC, as amended from time to time in accordance with the terms thereof.
"Subsidiary" means, with respect to any Person, any
corporation, limited liability company, partnership, association or other
business entity of which (i) if a corporation, a majority of the total voting
power of shares of stock entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees thereof
is at the time owned or controlled, directly or indirectly, by that Person or
one or more of the other Subsidiaries of that Person or a combination thereof,
or (ii) if a limited liability company, partnership, association or other
business entity, a majority of the partnership or other similar ownership
interest thereof is at the time owned or controlled, directly or indirectly, by
any Person or one or more Subsidiaries of that Person or a combination thereof.
For purposes hereof, a Person or Persons shall be deemed to have a majority
ownership interest in a limited liability company, partnership, association or
other business entity if such Person or Persons shall be allocated a majority of
limited liability company, partnership, association or other business entity
gains or losses or shall be or control any managing director or general partner
of such limited liability company, partnership, association or other business
entity.
8. MISCELLANEOUS PROVISIONS.
(a) Transfers in Violation of Agreement. Any Transfer or
attempted Transfer of any Executive Securities in violation of any provision of
this Agreement shall be void, and none of the LLC, the Company, or any
Subsidiary thereof shall record such purported Transfer on its books or treat
any purported transferee of such Executive Securities as the owner of such
securities for any purpose.
(b) Severability. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
any other provision or any other jurisdiction, but this Agreement shall be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
(c) Complete Agreement. This Agreement, those documents
expressly referred to herein, and other documents of even date herewith or with
the Prior Agreement embody the complete agreement and understanding among the
parties and supersede and preempt any prior understandings, agreements or
representations by or among the parties, written or oral, which may have related
to the subject matter hereof in any way (including, without limitation, the
Prior Agreement).
- 16 -
<PAGE> 17
(d) Counterparts. This Agreement may be executed in separate
counterparts, none of which need contain the signature of more than one party
hereto but each of which shall be deemed to be an original and all of which
taken together shall constitute one and the same agreement.
(e) Successors and Assigns.
(i) Except as otherwise provided herein, this
Agreement shall bind the parties hereto and their respective successors
and assigns and shall inure to the benefit of and be enforceable by the
parties hereto and their respective successors and assigns whether so
expressed or not.
(ii) Each of the Company, the LLC, the Executive, and
each holder of Executive Securities hereby acknowledges that upon and
after the dissolution and liquidation of the LLC, (A) all contractual
obligations and duties of the LLC hereunder shall thereafter bind and
be enforceable against the Company, (B) all rights and powers granted
to the LLC hereunder (including, without limitation, the repurchase
rights set forth in paragraph 3) shall inure to the benefit of and be
enforceable by the Company, (C) all references to the LLC shall
thereafter be deemed to be references to the Company, and (D) this
Agreement shall thereafter operate and be construed as if the word
"Company" were substituted for the word "LLC" in each such instance.
(f) CHOICE OF LAW. ALL QUESTIONS CONCERNING THE CONSTRUCTION,
VALIDITY, ENFORCEMENT AND INTERPRETATION OF THIS AGREEMENT AND THE EXHIBITS
HERETO SHALL BE GOVERNED BY THE INTERNAL LAW, AND NOT THE LAW OF CONFLICTS, OF
THE STATE OF DELAWARE.
(g) Remedies. Each of the parties to this Agreement (including
any holder of Investor Equity or employee of the Company to which the LLC
assigns any of its repurchase rights under paragraph 3 hereof) shall be entitled
to enforce its rights under this Agreement specifically, to recover damages and
costs (including reasonable attorney's fees) caused by any breach of any
provision of this Agreement and to exercise all other rights existing in its
favor. The parties hereto agree and acknowledge that money damages would not be
an adequate remedy for any breach of the provisions of this Agreement and that
any party may in its sole discretion apply to any court of law or equity of
competent jurisdiction (without posting any bond or deposit) for specific
performance and/or other injunctive relief in order to enforce or prevent any
violations of the provisions of this Agreement.
(h) Amendment, Modification, or Waiver. The provisions of this
Agreement may be amended, modified, or waived only with the prior written
consent of the LLC and the Executive.
(i) Third-Party Beneficiaries. The parties hereto acknowledge
and agree that certain provisions of this Agreement are intended for the benefit
of certain holders of Investor Equity or employees of the Company to which the
LLC assigns any of its repurchase rights under paragraph
- 17 -
<PAGE> 18
3 hereof, that such Persons are third-party beneficiaries of this Agreement and
that provisions of this Agreement shall be enforceable by such Persons as
provided herein.
(j) Business Days. If any time period for giving notice or
taking action hereunder expires on a day which is a Saturday, Sunday or legal
holiday in the State of Illinois, the time period shall be automatically
extended to the business day immediately following such Saturday, Sunday or
holiday.
(k) Descriptive Headings; Interpretation; No Strict
Construction. The descriptive headings of this Agreement are inserted for
convenience only and do not constitute a substantive part of this Agreement.
Whenever required by the context, any pronoun used in this Agreement shall
include the corresponding masculine, feminine or neuter forms, and the singular
forms of nouns, pronouns, and verbs shall include the plural and vice versa.
Reference to any agreement, document, or instrument means such agreement,
document, or instrument as amended or otherwise modified from time to time in
accordance with the terms thereof, and if applicable hereof. The use of the
words "include" or "including" in this Agreement shall be by way of example
rather than by limitation. The use of the words "or," "either" or "any" shall
not be exclusive. The parties hereto have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the parties hereto, and no presumption or burden of
proof shall arise favoring or disfavoring any party by virtue of the authorship
of any of the provisions of this Agreement.
(l) Notices. All notices, demands or other communications to
be given or delivered under or by reason of the provisions of this Agreement
shall be in writing and shall be deemed to have been given when (a) delivered
personally to the recipient, (b) telecopied to the recipient (with hard copy
sent to the recipient by reputable overnight courier service (charges prepaid)
that same day) if telecopied before 5:00 p.m. Chicago, Illinois time on a
business day, and otherwise on the next business day, or (c) one business day
after being sent to the recipient by reputable overnight courier service
(charges prepaid). Such notices, demands and other communications shall be sent
to the following Persons at the following addresses:
To the LLC:
c/o Madison Dearborn Capital Partners
Three First National Plaza
Suite 3800
Chicago, Illinois 60602
Attention: James N. Perry, Jr.
Telephone: (312) 895-1220
Telecopy: (312) 895-1001
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<PAGE> 19
with a copy (which shall not constitute notice) to:
Kirkland & Ellis
200 East Randolph Drive
Chicago, Illinois 60601
Attention: Mark B. Tresnowski, Esq.
Telephone: (312) 861-2385
Telecopy: (312) 861-2200
To the Company:
1950 Stemmons Freeway
Suite 3026
Dallas, Texas 75207
Attention: Royce J. Holland
Telephone: (214) 853-7105
Telecopy: (214) 853-7110
with a copy (which shall not constitute notice) to:
Kirkland & Ellis
200 East Randolph Drive
Chicago, Illinois 60601
Attention: Mark B. Tresnowski, Esq.
Telephone: (312) 861-2385
Telecopy: (312) 861-2200
To Executive: at the address set forth in the LLC's or the
Company's records.
or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party.
(m) Delivery by Facsimile. This Agreement, the agreements
referred to herein, and each other agreement or instrument entered into in
connection herewith or therewith or contemplated hereby or thereby, and any
amendments hereto or thereto, to the extent signed and delivered by means of a
facsimile machine, shall be treated in all manner and respects as an original
agreement or instrument and shall be considered to have the same binding legal
effect as if it were the original signed version thereof delivered in person. At
the request of any party hereto or to any such agreement or instrument, each
other party hereto or thereto shall reexecute original forms thereof and deliver
them to all other parties. No party hereto or to any such agreement or
instrument shall raise the use of a facsimile machine to deliver a signature or
the fact that any signature or agreement or instrument was transmitted or
communicated through the use of a facsimile machine as a defense to the
formation or enforceability of a contract and each such party forever waives
any such defense.
* * * *
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<PAGE> 20
IN WITNESS WHEREOF, the parties hereto have executed this
Amended and Restated Executive Purchase Agreement on the date first written
above.
ALLEGIANCE TELECOM, L.L.C.
By:
----------------------------------
Royce J. Holland,
its authorized member
ALLEGIANCE TELECOM, INC.
By:
----------------------------------
Royce J. Holland,
its Chairman and CEO
EXECUTIVE
--------------------------------------------
Name:
<PAGE> 1
EXHIBIT 10.10
GENERAL AGREEMENT
BETWEEN
ALLEGIANCE TELECOM, INC.
AND
LUCENT TECHNOLOGIES INC.
SSUH2-37635-4
<PAGE> 2
TABLE OF CONTENTS
GENERAL AGREEMENT
<TABLE>
<CAPTION>
Section Page
- ------- ----
<S> <C> <C>
ARTICLE I GENERAL TERMS AND CONDITIONS................................................................ 1
1.1 DEFINITIONS................................................................................. 1
1.2 TERM OF AGREEMENT........................................................................... 4
1.3 SCOPE....................................................................................... 4
1.4 CUSTOMER RESPONSIBILITY..................................................................... 4
1.5 ORDERS...................................................................................... 5
1.6 CHANGES IN CUSTOMER'S ORDERS................................................................ 7
1.7 CHANGES IN PRODUCTS......................................................................... 7
1.8 PRICES...................................................................................... 7
1.9 INVOICES AND TERMS OF PAYMENT............................................................... 8
1.10 PURCHASE MONEY SECURITY INTEREST............................................................ 10
1.11 TAXES....................................................................................... 11
1.12 TRANSPORTATION AND PACKING.................................................................. 11
1.13 TITLE AND RISK OF LOSS...................................................................... 11
1.14 WARRANTY.................................................................................... 11
1.15 INFRINGEMENT AND GENERAL INDEMNITIES........................................................ 14
1.16 REMEDIES.................................................................................... 16
1.17 USE OF INFORMATION.......................................................................... 17
1.18 DOCUMENTATION............................................................................... 18
1.19 5ESS(R)DOCUMENTATION........................................................................ 18
1.20 NOTICES..................................................................................... 18
1.21 FORCE MAJEURE............................................................................... 19
1.22 ASSIGNMENT.................................................................................. 19
1.23 TERMINATION OF AGREEMENT FOR BREACH......................................................... 20
1.24 NON-SOLICITATION............................................................................ 20
1.25 INDEPENDENT CONTRACTOR...................................................................... 20
1.26 RELEASES VOID............................................................................... 21
1.27 PUBLICITY................................................................................... 21
1.28 CONFIDENTIALITY OF AGREEMENT................................................................ 21
1.29 AMENDMENTS.................................................................................. 21
1.30 SEVERABILITY................................................................................ 21
1.31 WAIVER...................................................................................... 21
1.32 SURVIVAL.................................................................................... 22
1.33 SECTION HEADINGS............................................................................ 22
1.34 CHOICE OF LAW............................................................................... 22
1.35 FINANCING COMPANY........................................................................... 22
1.36 BENEFITS OF AGREEMENT....................................................................... 22
1.37 TESTING AND ACCEPTANCE...................................................................... 23
1.38 INSURANCE................................................................................... 23
1.39 SUPPORT AND MAINTENANCE..................................................................... 24
</TABLE>
SSUH2-37635-4
<PAGE> 3
<TABLE>
<CAPTION>
Section Page
- ------- ----
<S> <C> <C>
ARTICLE II PROVISIONS APPLICABLE TO LICENSED MATERIALS................................................. 24
2.1 LICENSE FOR LICENSED MATERIALS.............................................................. 24
2.2 CHANGES IN LICENSED MATERIALS............................................................... 25
2.3 CANCELLATION OF LICENSE..................................................................... 25
2.4 OPTIONAL SOFTWARE FEATURES.................................................................. 25
2.5 ADDITIONAL RIGHTS IN LICENSED MATERIALS..................................................... 25
2.6 INSTALLATION OF SOFTWARE.................................................................... 26
2.7 MODIFICATIONS BY CUSTOMER TO USER CONTROLLED
MODULES..................................................................................... 26
2.8 ADDITIONAL SOFTWARE RIGHTS FOR 5ESS(R) SWITCH
LICENSED MATERIALS.......................................................................... 26
ARTICLE III PROVISIONS APPLICABLE TO ENGINEERING, INSTALLATION
AND OTHER SERVICES.......................................................................... 27
3.1 SITE REQUIREMENTS........................................................................... 27
3.2 ADDITIONAL ITEMS TO BE PROVIDED BY CUSTOMER................................................. 28
3.3 ITEMS TO BE FURNISHED BY SELLER............................................................. 31
3.3.1 ENGINEERING......................................................................... 31
3.3.2 INSTALLATION........................................................................ 32
3.4 ACCEPTANCE OF SERVICES...................................................................... 35
3.5 WORK OR SERVICES PERFORMED BY OTHERS........................................................ 35
ARTICLE IV ENTIRE AGREEMENT............................................................................ 35
4.1 ENTIRE AGREEMENT............................................................................ 35
</TABLE>
SSUH2-37635-4
i
<PAGE> 4
This General Agreement Number LNM101697DASAT (hereinafter "GENERAL AGREEMENT" or
"AGREEMENT") is made effective as of the 16th day of October, 1997 ("EFFECTIVE
DATE"), by and between Allegiance Telecom, Inc., a Delaware corporation, with
offices located at 1950 Stemmons Freeway, Suite 3026, Dallas, Texas 75207
(hereinafter "CUSTOMER"), and Lucent Technologies Inc., a Delaware corporation,
acting through its Network Systems Group, with offices located at 600 Mountain
Avenue, Murray Hill, New Jersey 07974 (hereinafter "SELLER").
WHEREAS, Seller desires to supply to Customer and Customer desires to procure
from Seller the Products and Services described herein, pursuant to the terms
and conditions contained herein.
NOW, THEREFORE, in consideration of the mutual promises herein contained and
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, the parties intending to be lawfully bound agree as
follows:
1. ARTICLE I
GENERAL TERMS AND CONDITIONS
1.1 DEFINITIONS:
Capitalized terms used in this Agreement and in the Addendum shall have the
meanings ascribed to them herein and therein, and shall include the following
definitions:
(a) "AFFILIATE" of a corporation means its Subsidiaries, any company of
which it is a Subsidiary, and other Subsidiaries of such company.
(b) "BILL AND HOLD PRODUCTS" means Products, Licensed Materials, and/or
parts thereof, which the Customer requests and Seller agrees to
inventory or warehouse, at a price mutually agreed to by the parties,
until final delivery to the Customer.
(c) "CUSTOMER PRICE LIST" means Seller's published "Ordering and Price
Guides" or other price notification releases furnished by Seller for
the purpose of communicating Seller's prices or pricing related
information to Customer; however, this does not include firm price
quotations provided by Seller to Customer.
(d) "CUTOVER" means the verification by Seller and Customer of actual usage
of an installed Product and confirmation that such Product is capable
of revenue-generating service. This function occurs after Turnover and
is not performed by Seller unless specifically requested by Customer
and is usually covered under a separate Professional Services
Agreement.
(e) "DELIVERY DATE" means the date required under this Agreement by which
all deliverables ordered by Customer are to be delivered by Seller to
the destination specified in the order.
SSUH2-37635-4
Lucent Technologies/Allegiance Telecom Confidential
1
<PAGE> 5
(f) "DESIGNATED PROCESSOR" means the Product for which licenses to Use
Licensed Materials are granted.
(g) "FIRMWARE" means a combination of (1) hardware and (2) Software
represented by a pattern of bits contained in such hardware.
(h) "FIT" means physical size or mounting arrangement (e.g., electrical or
mechanical connections).
(i) "FORM" means physical shape.
(j) "FUNCTION" means the operation the Product performs.
(k) "HAZARDOUS MATERIALS" means material designated as a "hazardous
chemical substance or mixture" pursuant to Section 6 of the Toxic
Substance Control Act; a "hazardous material" as defined in the
Hazardous Materials Transportation Act (49 U.S.C. 1801, et seq.);
"hazardous substance" as defined in the Occupational Safety and Health
Act Hazard Communication Standard (29 CFR 1910.1200) or as defined in
the Comprehensive Governmental Response, Compensation and Liability
Act, 42 U.S.C. 9601 (14), or other pollutant or contaminant.
(l) "INSTALLATION COMPLETE DATE" means the date on which OS Software or
transmission systems Software is installed by Seller at the location
specified in the order and determined by Seller to be ready for Use by
Customer.
(m) "LICENSED MATERIALS" means the Software and Related Documentation for
which licenses are granted by Seller under this Agreement; no Source
Code versions of Software are included in Licensed Materials.
(n) "OS SOFTWARE" means the object code Software, for operations systems,
embodied in any medium, including Firmware.
(o) "PRODUCT" means equipment hardware, and parts thereof, but the term
does not mean Software whether or not such Software is part of
Firmware.
(p) "RELATED DOCUMENTATION" means materials useful in connection with
Software such as, but not limited to, flowcharts, logic diagrams and
listings, program descriptions and Specifications.
(q) "SELLER'S STANDARD CHARGES" means Seller's applicable rates and charges
for labor and materials as determined from Seller's Customer Price
Lists and other pricing information provided by Seller to Customer,
less any discounts applicable thereto.
(r) "SERVICES" means any engineering, installation or repair services to be
performed by Seller under this Agreement, but the term "Services" does
not include any services provided by the Professional Services Division
of Seller's Network Systems Group unless otherwise expressly agreed to
in writing by the parties.
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(s) "SOFTWARE" means a computer program consisting of a set of logical
instructions and tables of information that guide the functioning of a
processor. Such program may be contained in any medium whatsoever,
including hardware containing a pattern of bits, representing such
program. However, the term "Software" does not mean or include such
medium.
(t) "SOFTWARE UPGRADE" means the next base release of Base Software, i.e.,
5E12, 5E13, etc.
(u) "SOURCE CODE" means any version of Software incorporating high-level or
assembly language that generally is not directly executable by a
processor.
(v) "SPECIFICATIONS" means Seller's or its vendor's technical
specifications for particular Products or Software furnished hereunder.
(w) "STANDARD ORDER INTERVAL" means the time interval, as described in
SECTION 1.5(B) of this Agreement: (i) with respect to 5ESS(R)-2000
Products, between Seller's receipt of a Customer order and Turnover;
and (ii) with respect to all other Lucent Products, between Seller's
receipt of a Customer order and the Delivery Date.
(x) "STATEMENT OF WORK" (SOW) means the detailed description of the actual
Services to be performed.
(y) "SUBSIDIARY" of a company means a corporation the majority of whose
shares or others securities entitled to vote for election of directors
is now or hereafter owned or controlled by such company either directly
or indirectly, but such corporation shall be deemed to be a Subsidiary
of such company only as long as such ownership or control exists.
(z) "TURNOVER" means, with respect to Products and Software to be installed
by Seller, the point at which Seller has completed the installation and
notifies Customer that the installation is completed and that Seller
has confirmed that the installed Product and/or Software comply with
the applicable Specifications. This term does not mean Cutover which is
separately defined herein.
(aa) "US ONE ASSETS" means the combination of 5ESS(R)-2000 Products,
Transmission and Access Products and other Lucent-manufactured or
developed Products and Software that may be acquired by Customer,
directly or indirectly, in connection with the US One bankruptcy.
(bb) "USE" with respect to Licensed Materials that constitute Software,
means loading the Licensed Materials, or any portion thereof, into a
Designated Processor for execution of the instructions and tables
contained in such Licensed Materials.
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1.2 TERM OF AGREEMENT:
Subject to the terms of SECTION 1.32, the term of this Agreement ("TERM") shall
commence on the Effective Date and shall continue in effect thereafter for a
period of five (5) years, and following expiration of the initial five (5) year
term, shall thereafter automatically renew for additional one (1) year terms,
unless either party gives written notice of termination to the other party at
least sixty (60) calendar days prior to the expiration of the then-current term.
1.3 SCOPE:
(a) The terms and conditions of this Agreement shall apply to all
transactions occurring during the Term whereby Products, Licensed
Materials and/or Services are provided by Seller's Network Systems
Group to Customer. Except as expressly stated in this Agreement, this
Agreement shall not apply to any products, licensed materials or
services offered for supply by any of the following business units or
divisions of Seller: Microelectronics, Consumer Products, Business
Communications Systems, Network Wireless division of Network Systems
Group, or the Professional Services division of Network Systems Group.
By placing orders with Seller, including change and/or addition orders,
or using any Products, Licensed Materials, or Services provided
hereunder, Customer agrees to be bound to the terms of this Agreement.
Customer understands and agrees that all Products, Licensed Materials,
or Services furnished by Seller to Customer pursuant to this Agreement
shall be for Customer's own internal use in the United States only.
Products, Licensed Materials or Services furnished under this Agreement
are not being supplied for resale and shall not be resold by Customer.
(b) All firm price quotes made by Seller to Customer shall incorporate the
terms and conditions of this Agreement. Any conflicting terms and
conditions of a firm price quote, signed by an authorized
representative of Seller and Customer and dated after the effective
date of this Agreement, will supersede the comparable terms of this
Agreement.
(c) Attached hereto as EXHIBIT 2 is that certain Product Purchase Addendum
One to the General Agreement Between Customer and Seller ("ADDENDUM").
The Addendum contains certain additional terms and conditions that
supplement the non-conflicting terms and conditions of this Agreement
with respect to Products and Licensed Materials.
1.4 CUSTOMER RESPONSIBILITY:
Customer shall, at no charge to Seller, provide Seller with such technical
information, data, technical support or assistance as may reasonably be required
by Seller to fulfill its obligations under this Agreement, any subordinate
agreement or order. If Customer fails to provide the technical information,
data, support or assistance, Seller shall be excused from performing, and shall
not be in material breach of, any such obligation until such time as Customer
provides the required information, data, support or assistance to Seller.
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1.5 ORDERS:
(a) All orders submitted by Customer for Products, Licensed Materials, and
Services shall incorporate and be subject to the terms and conditions
of this Agreement. Any order submitted pursuant to a firm price
quotation shall include such firm price quotation number. All orders,
including electronic orders, shall contain the information as detailed
below:
(i) Complete and correct ship to and bill to address;
(ii) The quantity and type of Products, Licensed Materials, and
Services being ordered;
(iii) The price;
(iv) The requested Delivery Date or Turnover date, as applicable,
in accordance with Seller's Standard Order Interval for the
Products, Licensed Materials, and Services being ordered. In
the event a non-standard interval has been mutually agreed to
by the parties, a reference to the specific document agreeing
to the interval;
(v) The requested completion date in accordance with Seller's
Standard Order Interval for the Products, Licensed Materials,
and Services being ordered;
(vi) Reference to this Agreement;
(vii) If an order is for Bill and Hold Products, the phrase "Bill
and Hold" must be clearly and conspicuously stated in the
order.
The requested Delivery Date of any order must be in accordance with
Seller's published Standard Order Intervals in effect on the date of
receipt of order by Seller. The current Standard Order Intervals are
contained in SECTION 1.5(B) herein. Upon the mutual consent of the
parties, which consent shall not be unreasonably withheld, Seller shall
have the right to change such Standard Order Intervals, but only with
respect to future orders placed by Customer. Such change shall not
affect orders accepted by Seller prior to the change to the Standard
Order Intervals. Electronic orders shall be binding on Customer
notwithstanding the absence of a signature. All orders submitted by
Customer for Products must be signed by either the President and Chief
Executive Officer of Customer, the Chief Financial Officer of Customer,
or their designated representatives. Seller shall not be entitled to
rely upon or to enforce any order that is not authorized in accordance
with the foregoing; provided, however, that Seller shall have no duty
or obligation to investigate or make any inquiry with respect to the
accuracy or adequacy of any such signatures and shall be entitled to
act in reliance upon any and all information, documents and signatures
received by Seller pursuant to this Agreement. All orders are subject
to acceptance by Seller. Seller reserves the right to place any order
on hold, delay shipment, and/or reject any order only in the event of a
material breach by Customer of its
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obligations under this Agreement or Customer's insufficient credit
limits. Terms and conditions on Customer's purchase order which are
inconsistent with the provisions of this Agreement and any pre-printed
terms and conditions on Customer's purchase order shall be ineffective,
void and of no force and effect. Orders shall be sent to the following
address:
Lucent Technologies Inc.
Customer Service
6701 Roswell Road
Building D - 3rd Floor
Atlanta, GA 30328-2501
(b) If an order is for Bill and Hold Products, the phrase "Bill and Hold"
must clearly and conspicuously appear on the order. In the event
Customer orders Bill and Hold Products, Seller will defer final
shipment of such Product(s) until the final ship date indicated on the
purchase order or such final ship date as is mutually agreed between
the parties provided that in no event shall Seller be obligated to hold
Bill and Hold Products longer than one (1) year from the date of the
applicable purchase order. Customer agrees to pay to Seller a mutually
agreed monthly stocking fee for any Bill and Hold Products held beyond
the final ship date indicated on the purchase order or otherwise
mutually agreed date.
SELLER'S MANUFACTURED PRODUCTS AND SOFTWARE STANDARD ORDER
INTERVALS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------- ---------------------------------------------------------
PRODUCT/SOFTWARE STANDARD ORDER INTERVAL
- ---------------------------------------------------------------- ---------------------------------------------------------
<S> <C>
Switching Systems Products Twenty Two (22) Weeks for Standard
Configurations; Twenty Six (26) Weeks for
Non-Standard Configurations
- ---------------------------------------------------------------- ---------------------------------------------------------
Central Office Power Equipment Twenty Two (22) Weeks
- ---------------------------------------------------------------- ---------------------------------------------------------
Growth Eighteen (18) Weeks
- ---------------------------------------------------------------- ---------------------------------------------------------
TRANSMISSION SYSTEMS PRODUCTS:
- ---------------------------------------------------------------- ---------------------------------------------------------
DACS-IV 2000 Two (2) Weeks
- ---------------------------------------------------------------- ---------------------------------------------------------
FT-2000 OC-48 Two (2) Weeks
- ---------------------------------------------------------------- ---------------------------------------------------------
DDM-2000 OC-3/OC-12 Two (2) Weeks
- ---------------------------------------------------------------- ---------------------------------------------------------
DDM-2000 FIBER REACH Two (2) Weeks
- ---------------------------------------------------------------- ---------------------------------------------------------
SLC 2000 Access System One (1) Week
- ---------------------------------------------------------------- ---------------------------------------------------------
SLC 2000 MSDT One (1) Week
- ---------------------------------------------------------------- ---------------------------------------------------------
SLC Series 5 (System and Plug In) Two (2) Weeks
- ---------------------------------------------------------------- ---------------------------------------------------------
Other Transmission Products (i.e., DDM Plus, One (1) Week
Repeater Cases)
- ---------------------------------------------------------------- ---------------------------------------------------------
Network Cable Systems Products Contact Lucent Sales Person
- ---------------------------------------------------------------- ---------------------------------------------------------
All Other Products Contact Lucent Sales Person
- ---------------------------------------------------------------- ---------------------------------------------------------
</TABLE>
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<TABLE>
<CAPTION>
- ---------------------------------------------------------------- ---------------------------------------------------------
PRODUCT/SOFTWARE STANDARD ORDER INTERVAL
- ---------------------------------------------------------------- ---------------------------------------------------------
<S> <C>
SOFTWARE:
- ---------------------------------------------------------------- ---------------------------------------------------------
Switching System Software Same as associated Product
- ---------------------------------------------------------------- ---------------------------------------------------------
- ---------------------------------------------------------------- ---------------------------------------------------------
Transmission Systems Software Same as associated Product
- ---------------------------------------------------------------- ---------------------------------------------------------
- ---------------------------------------------------------------- ---------------------------------------------------------
Operations Systems Software Same as associated Product
- ---------------------------------------------------------------- ---------------------------------------------------------
- ---------------------------------------------------------------- ---------------------------------------------------------
All other Software Contact Lucent Sales Person
- ---------------------------------------------------------------- ---------------------------------------------------------
</TABLE>
1.6 CHANGES IN CUSTOMER'S ORDERS:
Changes by Customer to an order which has been previously accepted by Seller (a
"CHANGE ORDER") are subject to acceptance by Seller. Change Orders shall be
treated as a separate order and shall follow Seller's Change Order process, a
copy of which is attached hereto as EXHIBIT 3. In the event Seller accepts a
Change Order and such change affects Seller's ability to meet its obligations
under the original order, any price (or discount, if applicable), shipment date
or Services completion date quoted by Seller with respect to such original order
is subject to change. Seller will provide to Customer written quotations and
expected completion dates for any requested Change Orders.
1.7 CHANGES IN PRODUCTS:
Prior to shipment, Seller may at any time make changes in Products. Seller may
modify the Product(s) drawings and Specifications or substitute Products of
later design. Seller agrees that such modifications or substitutions will not
impact upon Form, Fit, or Function under normal and proper use of the ordered
Product as provided in Seller's Specifications. With respect to changes,
modifications, and substitutions that do impact the Form, Fit, or Function of
the ordered Product, Seller shall notify Customer in writing thirty (30) days
prior to the date the changes become effective. In the event Customer objects to
the change, Customer shall notify Seller within thirty (30) days from the date
of notice. Upon receipt of notice, Seller shall not furnish modified Products to
Customer on any orders in process.
1.8 PRICES:
(a) To the extent Customer's order is subject to a firm price quotation
made by Seller, prices, fees and charges (hereinafter "PRICES") shall
be as set forth in Seller's firm price quotation.
(b) Subject to any applicable discounts, and except as expressly stated in
this Agreement, in all other cases, Prices shall be those contained in
Seller's then-current Customer Price List. Upon thirty (30) calendar
days' prior written notice to Customer, Seller shall have the right to
increase the Prices set forth in its Customer Price List once annually;
provided, however, that such annual increase shall in no event exceed
five percent (5%) over the then-current Prices, and provided further
that such cap on annual increases shall not apply to "discontinued
availability" Products. Unless otherwise
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agreed to by the parties, the requested Delivery Date or Turnover date,
as applicable, specified in such order must be in accordance with
Seller's Standard Order Intervals.
(c) Seller may amend its Prices, other than those subject to firm price
quotations. Seller agrees that Price increases shall be in accordance
with the terms specified in SECTION 1.8(B). Seller shall have the
right, upon notice to Customer, to adjust Prices for cable Products
only for changes in raw material prices. When Prices for cable Products
contained in Seller's Customer Price List are adjusted for changes in
raw material prices, Seller's new Prices will be revised effective the
first day of any given month. The basis for raw material adjustments
will be provided to Customer upon request.
(d) For any Services not included in the Price of the applicable Product,
Seller shall invoice Customer for such Services on a monthly basis as
those Services are provided to Customer. Such Services shall be
rendered by Seller on a time-and-materials basis, provided that the
hourly rate for such services shall in no event exceed Two Hundred
Dollars ($200). Upon thirty (30) calendar days' prior written notice to
Customer, Seller shall have the right to increase such service rate
once annually.
(e) Seller shall provide to Customer an updated Customer Price List, in
electronic form, on an annual basis.
1.9 INVOICES AND TERMS OF PAYMENT:
(a) Payment for Products, Licensed Materials and Services (including
transportation charges and taxes, if applicable) will be due in
accordance with the payment schedule described below. Upon Seller's
acceptance of a Customer purchase order, Seller shall issue to Customer
a written notice of purchase order acceptance and request for payment,
and Customer thereafter shall have five (5) business days to pay to
Seller, by EFT, twenty percent (20%) of the value of such purchase
order. Subject to Seller's right to discontinue processing such order
in the event Customer fails to timely pay such twenty percent (20%)
amount, Seller will commence the order fulfillment process with respect
to such purchase order. Seller shall issue notice of readiness for
shipment and request for payment to Customer not more than two (2)
weeks prior to the date on which the Products and/or Licensed Materials
will be shipped by Seller, and Customer thereafter shall have five (5)
business days to pay Seller, by EFT, sixty percent (60%) of the value
of such purchase order. Upon receipt of the second scheduled payment,
Seller will release the shipment for delivery to Customer and will
provide to Customer a "record only" invoice after receipt of the second
payment Such invoice will reflect the amount due and payments received
through the date of the invoice. For switch Products: (i) final payment
will be invoiced upon the earlier of: (x) Cutover; and (y) sixty (60)
days after Turnover, provided that there are no identified
deficiencies, in which case the sixty (60) day period shall be
extended, on a day-by-day basis, until there are no outstanding
deficiencies; and (ii) payment shall be made by Customer by EFT within
five (5) days of receipt of such invoice by Customer. For
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furnish only orders, the final payment will be invoiced upon shipment
or as soon as practical thereafter, and payment is due for receipt by
Seller within thirty (30) days of the date of the invoice. A sample
invoice is provided in EXHIBIT 1 for informational purposes only.
<TABLE>
<CAPTION>
- --------------------------------------------------------------- ----------------------------------------------------------
5ESS(R)-2000 PRODUCTS PERCENT OF TOTAL AMOUNT OF
PAYMENT MILESTONE SCHEDULE PURCHASE ORDER DUE
- --------------------------------------------------------------- ----------------------------------------------------------
<S> <C>
Seller's Receipt and Acceptance of Purchase Order (Initial 20%
Payment)
- --------------------------------------------------------------- ----------------------------------------------------------
Upon Shipment of Products (Second Payment) 60%
- --------------------------------------------------------------- ----------------------------------------------------------
Upon Cutover (Final Payment) 20%
- --------------------------------------------------------------- ----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------- -------------------------------------------------------------
TRANSMISSION/ACCESS PRODUCTS PERCENT OF TOTAL AMOUNT OF
PAYMENTS MILESTONE SCHEDULE PURCHASE ORDER DUE
- -------------------------------------------------------------- -------------------------------------------------------------
<S> <C>
Seller's Receipt and Acceptance of Purchase Order (Initial 25%
Payment)
- -------------------------------------------------------------- -------------------------------------------------------------
Upon Shipment of Products 75%
- -------------------------------------------------------------- -------------------------------------------------------------
</TABLE>
(b) For Products, Licensed Materials and Services not included in
SUBSECTION (A) above (including transportation charges and taxes, if
applicable), Seller will invoice Customer all amounts due for Products
and Licensed Materials upon shipment and all amounts due for Services
upon completion of Services or, in either event, as soon as practical
thereafter. Customer shall pay such invoiced amounts for receipt by
Lucent within thirty (30) days of the date of the invoice. Bill and
Hold Products will be invoiced by Seller upon the earlier of: (i)
completion of assembly at Seller's facility; or (ii) upon stocking at
Customer's designated location. Such invoice will serve as Seller's
notification that Bill and Hold Products are complete and ready to be
released by Customer for final shipment.
(c) Customer shall pay or cause to be paid all amounts invoiced by Seller
(or amounts requested to be paid) hereunder using Electronic Funds
Transfer ("EFT"). EFT payments by Customer shall be made to the
following account of Seller or such other account as is subsequently
designated by Seller in writing and, concurrent with the EFT payment,
Customer shall fax a copy of the remittal to Seller's Manager Cash
Operations at 770-750-4288.
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Chase Manhattan Bank
New York, New York
Account Name: Lucent Technologies Inc.
ACCT. 910144-9099
ABA 021000021
(d) If Customer fails to pay any invoiced amount when due, the invoiced
amount, excluding any amounts disputed by Customer in good faith, will
be subject to a late payment charge at the rate of one and one half
percent (1-1/2%) per month, or portion thereof, of the undisputed
amount due (but not to exceed the maximum lawful rate).
(e) Customer agrees to review all invoices furnished by Seller hereunder
upon receipt and notify Seller of any billing discrepancies within a
reasonable time from Customer's receipt of the applicable invoice. Such
inquiries can be directed to Seller in writing or by telephone.
Inquiries shall be made to the telephone number or, if in writing, to
the address identified on the invoice.
1.10 PURCHASE MONEY SECURITY INTEREST:
Seller reserves and Customer agrees that Seller shall have a purchase money
security interest in all Products and Licensed Materials supplied to Customer by
Seller under this Agreement until any and all payments and charges for the
applicable Products or Licensed Materials due Seller under this Agreement,
including, without limitation, shipping and installation charges, are paid in
full. If required by Financing Company, Seller acknowledges that Seller's
purchase money security interest shall be subordinate to any security interest
required by Financing Company. Seller shall have the right, at any time during
the Term and without notice to Customer, to file in any state or local
jurisdiction such financing statements (e.g., UCC-l financing statements) as
Seller deems necessary to perfect its purchase money security interest
hereunder; provided, however, that all such financing statements shall reference
by purchase order number the specific purchase order to which the financing
statement relates, it being expressly acknowledged by Seller that it shall have
no right to file general, blanket financing statements with respect to Products
and/or Licensed Materials acquired by Customer under this Agreement. In the
event Seller files any financing statements, Seller promptly shall (within ten
(10) calendar days) execute and file, at Seller's sole cost and expense,
termination statement(s) evidencing the discharge of such obligations upon
Customer's payment of the purchase price of the applicable Products and/or
Licensed Materials. If Seller fails to comply with its obligation to timely file
lien termination statements as provided herein, and fails to cure such failure
within forty-eight (48) hours following receipt of written notice of such
failure, Customer shall have the right to take all steps necessary to remove
such liens, and to deduct from any sums that may then be due or become due to
Seller under this Agreement all costs including, without limitation, attorneys'
fees and expenses, incurred by Customer to remove such liens. Upon request by
Seller, Customer hereby agrees to timely execute all documents reasonably
necessary to secure Seller's purchase money security interest including without
limitation, UCC-1 or such other documents Seller deems reasonably necessary. In
the event Customer fails to timely execute such documents, Customer acknowledges
that Seller shall
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have the right to delay shipment of the Products/Licensed Materials that are the
subject of the financing statement that Customer has failed to timely execute.
1.11 TAXES:
Customer shall be liable for all taxes and related charges, however designated,
imposed upon or based upon the provision, sale, license or Use of Products,
Licensed Materials or Services, excluding taxes on Seller's net income, unless
Customer provides Seller with a valid tax exempt certificate. Seller's failure
to collect taxes in accordance herewith shall not be deemed to be an
authorization to resell Products or Services or sublicense Licensed Materials.
1.12 TRANSPORTATION AND PACKING:
Seller, in accordance with its normal practices, shall arrange for prepaid
transportation to destinations in the contiguous United States and shall invoice
transportation charges to Customer. Premium transportation will be used only at
Customer's request. Seller shall pack Products for delivery in the contiguous
United States in accordance with its standard practices for domestic shipments.
Where, in order to meet Customer's requests, Seller packs Products in other than
its normal manner, ships Products utilizing premium transportation or ships
Products to destinations outside the contiguous United States, Customer shall
pay the additional charges for such packing and transportation.
1.13 TITLE AND RISK OF LOSS:
Title to Products only and risk of loss to Products and Licensed Materials shall
pass to Customer and/or Financing Company, as applicable, upon delivery to the
Customer-designated delivery location or carrier set forth in the applicable
order. Title to all Licensed Materials (whether or not part of Firmware)
furnished by Seller, and all copies thereof made by Customer, including
translations, compilations, and partial copies are, and shall remain, the
property of Seller. Title to Bill and Hold Products only and risk of loss for
Bill and Hold Products and Licensed Material for Bill and Hold Products shall
pass to Customer upon stocking at Seller's facility or Customer's designated
location, whichever occurs earlier. Customer shall notify Seller promptly of any
claim with respect to loss which occurs while Seller has the risk of loss, and
of which Customer has knowledge, and shall cooperate in every reasonable way to
facilitate the settlement of any claim.
1.14 WARRANTY:
(a) GENERAL: Seller warrants to Customer that, during the applicable
Warranty Periods set forth below: (i) Seller's manufactured Products
(exclusive of Software) will be free from defects in material and
workmanship and will conform to Seller's Specifications for such
Products; (ii) subject to the terms of SECTION 1.14(E), Software
developed by Seller will be free from those defects which prevent
performance in accordance with Seller's Specifications; and (iii)
Services will be performed in a workmanlike manner and in accordance
with Seller standards. With respect to Products or Software or partial
assembly of Products furnished by Seller, but neither manufactured by
Seller nor
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purchased by Seller pursuant to its procurement specifications ("VENDOR
ITEMS"), Seller, to the extent permitted, does hereby assign to
Customer the warranties given to Seller by its vendor(s) of such Vendor
Items. In the event such warranties are not assignable to Customer by
Seller, if necessary, Seller shall enforce such warranties on
Customer's behalf. In addition, at Customer's request, and to the
extent that registration is available, Seller shall register Customer
with any and all Vendor Item vendors such that Customer is acknowledged
as a support obligation and Customer can receive and obtain Vendor Item
notices directly from the applicable vendor.
(b) WARRANTY PERIODS: For purposes of this Agreement the term "WARRANTY
PERIOD" means the period of time listed below which, unless otherwise
agreed to by the parties, commences on the date of shipment for
Products installed by Customer, or, if installed by Seller, the
earliest of either: (i) Acceptance by Customer; or (ii) thirty (30)
days following Turnover; or (iii) Cutover. For Bill and Hold Products,
the Warranty Period will commence upon the date of stocking at Seller's
facility or Customer's designated location. The Warranty Period for any
Product or Software (or part thereof) repaired or replaced under this
SECTION 1.14 is the period listed in the right column below or the
unexpired portion of the new Product Warranty Period, whichever is
longer.
SELLER'S MANUFACTURED PRODUCTS AND SOFTWARE
WARRANTY PERIOD
<TABLE>
<CAPTION>
- ---------------------------------------------------------------- ---------------------------- -----------------------------
BASE PERIOD REPAIRED
NEW PRODUCT PRODUCT OR PART
- ---------------------------------------------------------------- ---------------------------- -----------------------------
<S> <C> <C>
Switching Systems Products 24 Months 6 Months
- ---------------------------------------------------------------- ---------------------------- -----------------------------
CENTRAL OFFICE POWER EQUIPMENT:
- ---------------------------------------------------------------- ---------------------------- -----------------------------
Associated with Switching Systems 24 Months 6 Months
- ---------------------------------------------------------------- ---------------------------- -----------------------------
Not Associated with Switching Systems 12 Months 6 Months
- ---------------------------------------------------------------- ---------------------------- -----------------------------
TRANSMISSION SYSTEMS PRODUCTS:
- ---------------------------------------------------------------- ---------------------------- -----------------------------
DACS-IV 2000, 60 Months 6 Months
- ---------------------------------------------------------------- ---------------------------- -----------------------------
FT-2000 OC-48 60 Months 6 Months
- ---------------------------------------------------------------- ---------------------------- -----------------------------
DDM-2000 OC-3/OC-12 60 Months 6 Months
- ---------------------------------------------------------------- ---------------------------- -----------------------------
DDM-2000 FIBER REACH 60 Months 6 Months
- ---------------------------------------------------------------- ---------------------------- -----------------------------
SLC 2000 Access System 60 Months 6 Months
- ---------------------------------------------------------------- ---------------------------- -----------------------------
SLC 2000 MSDT 60 Months 6 Months
- ---------------------------------------------------------------- ---------------------------- -----------------------------
SLC Series 5 (System and Plug In) 60 Months 6 Months
- ---------------------------------------------------------------- ---------------------------- -----------------------------
Other Transmission Products (i.e., DDM Plus 24 Months 6 Months
Repeater Cases)
- ---------------------------------------------------------------- ---------------------------- -----------------------------
Network Cable Systems Products 12 Months 3 Months
- ---------------------------------------------------------------- ---------------------------- -----------------------------
All Other Products 2 Months 2 Months
- ---------------------------------------------------------------- ---------------------------- -----------------------------
SOFTWARE:
- ---------------------------------------------------------------- ---------------------------- -----------------------------
Base Software, including Software Upgrades (e.g., 5ESS(R)-2000 12 Months 6 Months
Software and all releases thereto)
- ---------------------------------------------------------------- ---------------------------- -----------------------------
</TABLE>
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<TABLE>
<CAPTION>
- ---------------------------------------------------------------- ---------------------------- -----------------------------
BASE PERIOD REPAIRED
NEW PRODUCT PRODUCT OR PART
- ---------------------------------------------------------------- ---------------------------- -----------------------------
<S> <C> <C>
Transmission Systems Software 12 Months 6 Months
- ---------------------------------------------------------------- ---------------------------- -----------------------------
OS Software 3 Months 1 Month
- ---------------------------------------------------------------- ---------------------------- -----------------------------
All Other Software 3 Months 1 Month
- ---------------------------------------------------------------- ---------------------------- -----------------------------
</TABLE>
(c) WARRANTY PROCEDURES: If, under normal and proper use, a defect or
non-conformity appears in Seller's manufactured Products or Software
during the applicable Warranty Period and Customer promptly notifies
Seller in writing of such defect or non-conformance and follows
Seller's instructions regarding return of defective or non-conforming
Product or Software, at Seller's sole expense, Seller will exercise its
best efforts to either repair, replace or correct such Product or
Software without charge at its manufacturing or repair facility as soon
as possible, but in no event later than thirty (30) days following
receipt of such Product or Software unless otherwise agreed to in
writing by the parties. If Seller is unable to repair, replace or
correct the non-conforming or defective Product or Software as provided
above after exercising its best efforts to do so, Seller shall provide
a refund or credit to Customer of the original purchase price or
license fee paid by Customer for the non-conforming or defective
Product or Software. If engineering or installation Services prove not
to be performed as warranted within a six (6) month period commencing
on the date of completion of the Services, Seller, at Customer's option
and at Seller's sole expense, either: (i) will correct the defect or
non-conforming Services; or (ii) render a full or pro-rated refund or
credit based on the original charges for the Services. No Product or
Software will be accepted for repair or replacement without the
authorization of and in accordance with instructions of Seller. Removal
and reinstallation expenses as well as transportation expenses
associated with returning such Product or Software to Seller shall be
borne by Customer. After Seller repairs such Product or Software or
acquires a replacement Product or Software, Seller shall pay the costs
of transportation of the repaired or replacement Product or Software to
any United States destination designated by Customer. If Seller
determines that the returned Product or Software is not defective and
such absence of defect(s) could reasonably have been discovered by
Customer, Customer shall pay Seller's costs of handling, inspecting,
testing and transportation and, if applicable, travel and related
expenses. In repairing or replacing any Product, part of Product, or
Software medium under this warranty, Seller may use either new,
remanufactured, reconditioned, refurbished or functionally equivalent
Products or parts; provided, however, that such repair or replacement
will not impact upon the Form, Fit or Function of the Product or
Software under normal and proper use, as provided in Seller's
Specifications. Replaced Products or parts shall become Seller's
property.
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(d) NON-RETURNABLE PRODUCTS: With respect to Seller's manufactured products
which are not readily returnable for repair, Seller shall repair or
replace the Products at Customer's site. Customer shall make the
Products accessible for repair or replacement at no cost to Seller, and
following such repair or replacement, Seller shall restore the site
after Seller has completed its repairs or replacement. Seller shall be
responsible for all costs related to the repair or replacement of the
Products.
(e) EXCLUSIONS: Seller makes no warranty with respect to defective
conditions or non-conformities resulting from any of the following:
Customer's modifications, misuse, neglect, accident or abuse; improper
wiring, repairing, splicing, alteration, installation, storage or
maintenance; use in a manner not in accordance with Seller's or its
vendor's Specifications, or operating instructions or failure of
Customer to apply previously applicable Seller's modifications or
corrections. In addition, Seller makes no warranty with respect to
Products which have had their serial numbers or month and year of
manufacture removed, altered and with respect to expendable items,
including, without limitation, fuses, light bulbs, motor brushes and
the like. No warranty is made that Software will run uninterrupted or
error free, and in addition Seller makes no warranty with respect to
defects related to Customer's data base errors.
(f) WARRANTY OF TITLE: Seller represents and warrants that it has the full
authority to license or sublicense all Licensed Materials and to sell
all Products to Customer. Seller further represents and warrants that
all Products shall be free and clear of all liens, claims, encumbrances
and demands of third parties, except as provided for in SECTION 1.10.
(g) DATE ROLLOVER WARRANTY: Seller warrants to Customer that, during the
applicable Warranty Period: (a) the Software will process all date, day
and time calculations falling on or after January 1, 2000, to the
extent that such Software processes day, date and time calculations;
and (b) that the Software will have no adverse loss in functionality
with respect to introduction of data containing dates falling on or
after January 1, 2000 (the foregoing is hereinafter referred to as
"YEAR 2000 CAPABILITY"). Notwithstanding anything in this Section to
the contrary, no warranty is made that the Year 2000 Capability
warranty will make the Software be compatible with any other third
party software or hardware used by Customer.
(h) THE FOREGOING WARRANTIES ARE EXCLUSIVE AND ARE IN LIEU OF ALL OTHER
EXPRESS AND IMPLIED WARRANTIES, INCLUDING BUT NOT LIMITED TO WARRANTIES
OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. CUSTOMER'S
SOLE AND EXCLUSIVE REMEDY SHALL BE SELLER'S OBLIGATION TO REPAIR,
REPLACE, CREDIT, OR REFUND AS SET FORTH ABOVE IN THIS WARRANTY.
1.15 INFRINGEMENT AND GENERAL INDEMNITIES:
(a) In the event of any claim, action, proceeding or suit by a
third party against Customer alleging an infringement of any
United States patent or a violation in the United States of
any copyright, trademark, trade secret or other proprietary
right
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by reason of the use, in accordance with Seller's
Specifications, of any Product or Licensed Materials furnished
by Seller to Customer under this Agreement, Seller, at its
sole expense, will indemnify, defend and hold harmless
Customer, subject to the conditions and exceptions stated
below. Seller will reimburse Customer for any cost, expense
and attorneys' fees, incurred at Seller's written request or
authorization, and will indemnify Customer against any
liability assessed against Customer by final judgment on
account of such infringement or violation arising out of such
use.
(b) If Customer's use shall be enjoined or in Seller's opinion is
likely to be enjoined, Seller will, at Seller's sole expense,
either: (1) replace the enjoined Product or Licensed Materials
furnished pursuant to this Agreement with a substitute with
the same Form, Fit and Function free of any infringement; (2)
modify the enjoined Product or Licensed Material so that it
will be free of the infringement; or (3) procure for Customer
a license or other right to use the enjoined Product or
Licensed Material. If none of the foregoing options are
commercially practical, Seller will remove the enjoined
Product or Licensed Materials, during which period Customer
will transition from such Product(s) to a replacement product,
and in the event of such return, Seller shall refund to
Customer the depreciated value of such Product(s) based on the
following depreciation schedule (commencing upon Acceptance
for the applicable Product): year 1 -- 100%; year 2 -- 90%;
year 3 --80%; year 4 -- 70%; year 5 -- 60%; year 6 -- 50%;
year 7 -- 40%; year 8 -- 30%; year 9 -- 20%; year 10 -- 10%.
(c) Customer shall give Seller prompt written notice of all such
claims, actions, proceedings or suits alleging infringement or
violation and Seller shall have full and complete authority to
assume the sole defense thereof, including appeals, and to
settle same. Customer shall, upon Seller's request and at
Seller's expense, furnish all information and assistance
available to Customer and cooperate in every reasonable way to
facilitate the defense and/or settlement of any such claim,
action, proceeding or suit.
(d) No undertaking of Seller under this section shall extend to
any such alleged infringement or violation to the extent that
it: (1) arises from adherence to design modifications,
specifications, drawings, or written instructions which Seller
is directed by Customer to follow, but only if such alleged
infringement or violation does not reside in corresponding
commercial Product or Licensed Materials of Seller's design or
selection; or (2) arises from adherence to instructions to
apply Customer's trademark, trade name or other company
identification; or (3) relates to uses of Product or Licensed
Materials provided by Seller in combinations with other
product or licensed materials, furnished by third parties,
which combination was not installed, recommended or otherwise
approved by Seller. In the foregoing cases numbered (1)
through (3), Customer will defend and save Seller harmless,
subject to the same terms and conditions and exceptions stated
above, with respect to Seller's rights and obligations under
this section.
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(e) The liability of Seller and Customer with respect to any and
all claims, actions, proceedings or suits by third parties
alleging infringement of patents, trademarks or copyrights or
violation of trade secrets or proprietary rights because of,
or in connection with, any Products or Licensed Materials
furnished pursuant to this Agreement shall be limited to the
specific undertakings contained in this section.
(f) Each party shall indemnify, defend and hold the other and its
directors, officers, shareholders, employees, successors and
assigns (collectively, the "INDEMNIFIED PARTIES") harmless
from and against any and all claims of third parties, and
shall pay all damages, costs and expenses, including
attorneys' fees, incurred by the Indemnified Parties for
bodily injury, including death, and property damage that
results or arises out of a party's employees, agents or
representatives' negligence or intentional acts arising out of
or relating to performance or non-performance under this
Agreement. This indemnity shall not be limited by reason of
any insurance coverage required under this Agreement. A
party's indemnity obligation under this Section shall be
reduced to the extent the other party is found to have been
contributorily negligent or otherwise at fault.
1.16 REMEDIES:
(a) THE PARTIES' EXCLUSIVE REMEDIES AND THE ENTIRE LIABILITY OF A PARTY,
ITS AFFILIATES AND THEIR EMPLOYEES, AGENTS AND SUPPLIERS FOR ANY CLAIM,
LOSS, DAMAGE OR EXPENSE OF THE OTHER PARTY OR ANY OTHER ENTITY ARISING
OUT OF THIS AGREEMENT, OR THE USE OR PERFORMANCE OF ANY PRODUCT,
LICENSED MATERIALS, OR SERVICES, WHETHER IN AN ACTION FOR OR ARISING
OUT OF BREACH OF CONTRACT, TORT, INCLUDING NEGLIGENCE, INDEMNITY, OR
STRICT LIABILITY, SHALL BE AS FOLLOWS:
(i) FOR INFRINGEMENT--THE REMEDY SET FORTH IN THE "INFRINGEMENT"
SECTION;
(ii) FOR THE NON-PERFORMANCE OF PRODUCTS, SOFTWARE, AND SERVICES
DURING THE WARRANTY PERIOD--THE REMEDY SET FORTH IN THE
APPLICABLE "WARRANTY" SECTION;;
(iii) FOR TANGIBLE PROPERTY DAMAGE AND PERSONAL INJURY CAUSED BY
SELLER'S NEGLIGENCE OR INTENTIONAL ACTS--IF APPLICABLE, THE
REMEDY SET FORTH IN SECTION 1.15(F), OR THE AMOUNT OF THE
PROVEN DIRECT DAMAGES; AND
(iv) SUBJECT TO THE TERMS OF SECTION 1.16(D) BELOW, FOR EVERYTHING
OTHER THAN AS SET FORTH ABOVE--THE AMOUNT OF THE PROVEN DIRECT
DAMAGES, NOT TO EXCEED THE TOTAL OF ALL AMOUNTS PAID TO SELLER
PURSUANT TO THIS AGREEMENT, UP TO TEN MILLION DOLLARS
($10,000,000), INCLUDING AWARDED COUNSEL FEES AND COSTS.
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(b) SUBJECT TO THE TERMS OF SECTION 1.16(d) BELOW, NEITHER PARTY NOR THEIR
RESPECTIVE AFFILIATES, EMPLOYEES, AGENTS AND SUPPLIERS SHALL BE LIABLE
FOR ANY INCIDENTAL, INDIRECT, OR CONSEQUENTIAL DAMAGES OR LOST PROFITS,
REVENUES OR SAVINGS ARISING OUT OF THIS AGREEMENT, OR THE USE OR
PERFORMANCE OF ANY PRODUCT, LICENSED MATERIALS, OR SERVICES, WHETHER IN
AN ACTION FOR OR ARISING OUT OF BREACH OF CONTRACT, TORT, INCLUDING
NEGLIGENCE, OR STRICT LIABILITY. THIS SECTION, 1.16(b) SHALL SURVIVE
FAILURE OF AN EXCLUSIVE OR LIMITED REMEDY.
(c) EACH PARTY SHALL GIVE THE OTHER PROMPT WRITTEN NOTICE OF ANY CLAIM. ANY
ACTION OR PROCEEDING AGAINST A PARTY MUST BE BROUGHT WITHIN TWENTY-FOUR
(24) MONTHS AFTER THE CAUSE OF ACTION BECOMES KNOWN.
(d) Notwithstanding anything contained herein to the contrary, the
limitation of liability provisions set forth in this SECTION 1.16 shall
not apply to Seller's indemnification obligations under this Agreement.
1.17 USE OF INFORMATION:
All technical and business information in whatever form recorded which bears a
legend or notice restricting its use, copying, or dissemination or, if not in
tangible form, is described as being proprietary or confidential at the time of
disclosure and is subsequently summarized in a writing so marked and delivered
to the receiving party within thirty (30) days of disclosure to the receiving
party (all hereinafter designated "INFORMATION") shall remain the property of
the furnishing party. The furnishing party grants the receiving party the right
to use such Information only for purposes expressly permitted in this section.
Such Information: (a) shall not be reproduced or copied, in whole or part,
except for use as authorized in this Agreement; and (b) shall, together with any
full or partial copies thereof, be returned or destroyed when no longer needed.
Moreover, when Seller is the receiving party, Seller shall use such Information
only for the purpose of performing under this Agreement, and when Customer is
the receiving party, Customer shall use such Information only (c) to order; (d)
to evaluate Seller's Products, Licensed Materials and Services; or (e) to
install, operate and maintain the particular Products and Licensed Materials for
which it was originally furnished. Unless the furnishing party consents in
writing, such Information, except for that part, if any, which is known to the
receiving party free of any confidential obligation, or which becomes generally
known to the public through acts not attributable to the receiving party, shall
be held in confidence by the receiving party. If Customer wants to disclose any
of such Information to a third party other than direct competitors, Lucent
agrees that it will negotiate in good faith with such third party the terms of a
non-disclosure agreement; provided, however, that Lucent agrees that Intertech
Management Group, Inc. shall have the right to have access to Lucent
Information. The receiving party may disclose such Information to other persons,
upon the furnishing party's prior written authorization, but solely to perform
acts which this section expressly authorizes the receiving party to perform
itself and further provided such other person agrees in writing (a
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copy of which writing will be provided to the furnishing party at its request)
to the same conditions respecting use of Information contained in this section
and to any other reasonable conditions requested by the furnishing party.
1.18 DOCUMENTATION:
Seller shall furnish to Customer, at no additional charge, one (1) copy of the
documentation for Products and/or one (1) copy of the Related Documentation for
Software licensed to Customer. Such documentation shall be that which is
customarily provided by Seller to its Customers at no additional charge. Such
documentation shall be sufficient to enable Customer to operate and maintain
such Products and Software in accordance with Seller's Specifications. Such
documentation shall be provided either prior to, included with, or shortly after
shipment of Products and/or Software from Seller to Customer. Additional copies
of such documentation are available at prices set forth in Seller's Customer
Price Lists.
1.19 5ESS(R) DOCUMENTATION:
Seller will provide to Customer at no charge one (1) copy each of the most
recent text and drawing CD-ROM or one (1) login to the 5ESS(R) Switch
Specifications Dial-Up Service for each new host/standalone switch site. No
documentation will be provided to RSMs (Remote Site Module) or ORMs (Optical
Remote Module). In addition, Seller will provide updates at no charge to the
host/standalone site for a period of two (2) years following switch Turnover.
After the initial two (2) year update period, Customer may purchase an update
subscription at the standard subscription rate.
1.20 NOTICES:
(a) Any notice, demand or other communication (other than an order)
required, or which may be given, under this Agreement shall, unless
specifically otherwise provided in this Agreement, be in writing and
shall be given or made by nationally recognized overnight courier
service, confirmed facsimile, or certified mail, return receipt
requested, and shall be addressed to the respective parties as follows:
If to Seller:
Lucent Technologies Inc.
Global Commercial Markets
5440 Millstream Road, E2N32
I-85 & Mt. Hope Church Road
Mc Leansville, North Carolina 27301
Attn: Contract Manager
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If to Customer:
Allegiance Telecom, Inc.
1950 Stemmons Freeway
Suite 3026
Dallas, Texas 75207
Attn: Chief Executive Officer
(b) Any such notice shall be effective upon receipt. Each party may change
its designated representative who is to receive communications and
notices and/or the applicable address for such communications and
notices by giving notice thereof to the other party as provided herein.
1.21 FORCE MAJEURE:
Except for payment obligations, neither party shall be held responsible for any
delay or failure in performance to the extent that such delay or failure is
caused by fires, embargoes, explosions, earthquakes, floods, wars, water, the
elements, government requirements, civil or military authorities, acts of God or
by the public enemy, inability to secure raw materials or transportation
facilities, acts or omissions of carriers or suppliers, or other causes beyond
its reasonable control. Each party agrees that it will cooperate in all
reasonable respects with the other upon the occurrence of a force majeure event,
it being acknowledged by the parties that continued performance hereunder is
critical. If, notwithstanding such efforts, any of the above-enumerated
circumstances prevent, hinder or delay performance of either party's obligations
hereunder for more than forty-five (45) calendar days, the party not prevented
from performing may, at its option, terminate the affected order(s) without
liability or penalty as of a date specified by such party in a written notice of
termination to the other party.
1.22 ASSIGNMENT:
Except as provided in this section, neither party shall assign this Agreement or
any right or interest under this Agreement, nor subcontract or delegate any work
or obligation to be performed under this Agreement (an "ASSIGNMENT") without the
other party's prior written consent. Any attempted assignment in contravention
of the foregoing shall be void and ineffective. Notwithstanding the foregoing,
each party shall have the right to assign this Agreement and to assign its
rights and delegate its duties under this Agreement, in whole or in part, at any
time upon notice to the other party, to any present or future "AFFILIATE" of the
party or to any combination of Affiliates, provided the assignor remains
responsible for the assignee's obligations, the assignee acknowledges to the
non-assigning party its obligations under the Agreement, and such assignee is
not engaged in the manufacture of telecommunications equipment in direct
competition with Seller. Such assignment or delegation shall release the
assigning party from any further obligation or liability thereon. For the
purposes of this section, the term "AGREEMENT" includes this Agreement, any
executed Statement of Work, any subordinate agreement placed under this
Agreement and any order placed under this Agreement or subordinate agreement.
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1.23 TERMINATION OF AGREEMENT FOR BREACH:
The parties acknowledge and agree that a material breach or default of the terms
of this Agreement shall have occurred in the event: (a) Seller fails to achieve
Turnover or the Delivery Date for a Product, as applicable, in accordance with
the Standard Order Interval for such Product; provided, however, that Seller
shall have a cumulative grace period of forty-five (45) calendar days during the
Exclusivity Period to achieve all Delivery Dates and Turnover dates occurring
during the Exclusivity Period in accordance with the Standard Order Intervals,
and provided further that Seller shall not be held responsible for any
Customer-caused delays; and (b) any Product fails to achieve Acceptance as set
forth in SECTION 1.37. In the event either party is in material breach or
default of the terms of this Agreement (excluding SUBSECTIONS (A) and (B) of
this SECTION 1.23) and such breach or default continues for a period of thirty
(30) days after the receipt of written notice from the other party, then the
party not in breach or default shall have the right to terminate this Agreement
and/or the applicable order(s) without any charge, obligation or liability
except for Products or Licensed Materials already delivered and Services already
performed. In addition to the foregoing, upon a material breach of this
Agreement by or with respect to Seller (including, without limitation, a
material breach under SUBSECTION (a) or (b) of this SECTION 1.23), Customer
shall have the right to terminate the exclusivity requirement set forth in
SECTION A-1.3 of the Addendum. The party not in breach or default shall provide
full cooperation to the other party in every reasonable way to facilitate the
remedy of the breach or default hereunder within the applicable cure period.
Notwithstanding the foregoing, but excluding the events set forth in SUBSECTIONS
(a) and (b) of this SECTION 1.23, if the nature of the material breach or
default is such that it is not a payment obligation and it is incapable of cure
within the foregoing thirty (30) day period, then the thirty (30) day cure
period may be extended for a reasonable period of time (in no event to exceed an
additional thirty (30) days), provided that the party in breach or default is
proceeding diligently and in good faith to effectuate a cure.
1.24 NON-SOLICITATION:
During the term of this Agreement and for a period of one (1) year from the
termination of this Agreement or a Statement of Work, the parties agree not to
solicit for employment or a consulting relationship with any employee,
subcontractor or consultant of the other party who is directly and actively
involved with the delivery of Services under this Agreement, except upon the
prior written consent of the affected party.
1.25 INDEPENDENT CONTRACTOR:
All work performed by either party under this Agreement shall be performed as an
independent contractor and not as an agent of the other, and no persons
furnished by the performing party shall be considered the employees or agents of
the other.
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1.26 RELEASES VOID:
Neither party shall require releases or waivers of any personal rights from
representatives or employees of the other in connection with visits to its
premises, nor shall such parties plead such releases or waivers in any action or
proceeding.
1.27 PUBLICITY:
Neither party shall issue or release for publication any articles, advertising,
or publicity material relating to Products, Licensed Materials, or Services
under this Agreement or mentioning or implying the name, trademarks, logos,
trade name, service mark or other company identification of the other party or
any of its Affiliates or any of its personnel without the prior written consent
of the other party.
1.28 CONFIDENTIALITY OF AGREEMENT:
Notwithstanding the obligations contained in SECTION 1.17 (Use of Information)
of this Agreement, the parties shall keep all provisions of this Agreement and
any order submitted hereunder (including, without limitation, prices and pricing
related information) confidential except as reasonably necessary for performance
by the parties hereunder and except to the extent disclosure may be required by
applicable laws or regulations, in which latter case, the party required to make
such disclosure shall promptly inform the other prior to such disclosure in
sufficient time to enable such other party to make known any objections it may
have to such disclosure. The disclosing party shall take all reasonable steps
and exercise all reasonable efforts to secure a protective order, seek
confidential treatment, or otherwise assure that this Agreement and/or any order
will be withheld from the public record.
1.29 AMENDMENTS:
Any supplement, modification or waiver of any provision of this Agreement must
be in writing and signed by authorized representatives of both parties.
1.30 SEVERABILITY:
If any portion of this Agreement is found to be invalid or unenforceable, the
parties agree that the remaining portions shall remain in effect. The parties
further agree that in the event such invalid or unenforceable portion is an
essential part of this Agreement, they will immediately begin negotiations for a
replacement.
1.31 WAIVER:
If either party fails to enforce any right or remedy available under this
Agreement, that failure shall not be construed as a waiver of any right or
remedy with respect to any other breach or failure by the other party.
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1.32 SURVIVAL:
The rights and obligations of the parties which by their nature would continue
beyond the termination cancellation, or expiration of this Agreement, shall
survive such termination, cancellation or expiration including, without
limitation: (a) any of Seller's then-unexpired warranty obligations; (b) the
confidentiality obligations set forth in SECTION 1.28; (c) the indemnification
obligations set forth in SECTION 1.15; and (d) Seller's obligation to provide
support and maintenance services for a Product for a period of three (3) years
following expiration of the Standard Order Interval for such Product, as further
described in the Addendum.
1.33 SECTION HEADINGS:
The section headings in this Agreement are inserted for convenience only and are
not intended to affect the meaning or interpretation of this Agreement.
1.34 CHOICE OF LAW:
The construction and interpretation of, and the rights and obligations of the
parties pursuant to this Agreement, shall be governed by the laws of the State
of Illinois without regard to its conflict of laws provisions.
1.35 FINANCING COMPANY:
Seller acknowledges that Customer intends to obtain from a third-party financing
company ("FINANCING COMPANY") acquisition financing for some or all of the
Products acquired by Customer from Seller under this Agreement. In the event
Customer fails to obtain third party financing prior to the shipment date of the
first 5ESS(R)-2000 Switch, Customer shall have the right to terminate the
exclusivity commitment under SECTION A-1.3, Addendum, in which instance: (a) the
discounts set forth in SECTION A-1.5, Addendum, shall automatically terminate;
and (b) Customer shall have the right to cancel any outstanding purchase orders
and, upon such cancellation, Customer shall receive a refund on all monies paid
to Seller with respect to such cancelled purchase order(s) less engineering
costs specified in the purchase order(s) that are actually incurred.
1.36 BENEFITS OF AGREEMENT:
Provided: (a) Customer guarantees an Affiliate's obligations; (b) the Affiliate
acknowledges to Seller its obligations under this Agreement; and (c) the
Affiliate is not engaged in the manufacture of telecommunications equipment in
direct competition with Seller, Seller agrees that such Affiliate of Customer
shall have the right to acquire and/or license Products and Licensed Materials
from Seller in accordance with the terms set forth in this Agreement, including
the Addendum.
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1.37 TESTING AND ACCEPTANCE:
The testing procedures described in this SECTION 1.37 shall apply to all switch
Products acquired by Customer.
(a) PRE-TURNOVER TESTING. Upon completion of all installation activities
relating to a Product, Seller shall test the Product as provided in
this SECTION 1.37 to ensure that the Product operates in accordance
with the applicable Specifications. Pre-Turnover testing for each
Product shall consist of testing the Product components on a unit and
integrated basis to ensure that all Product components operate in
accordance with the applicable Specifications ("OPERATIONS TESTING").
(b) TURNOVER. In the event defects are discovered as a result of
pre-Turnover testing, Seller promptly shall correct such defects. When
all such defects have been corrected by Seller so that the Product
operates in accordance with the applicable Specifications, Seller shall
give Customer written notice that Turnover has occurred and the Product
shall thereafter be available for post-Turnover testing by Customer in
accordance with the terms of SUBSECTION (C) below.
(c) POST-TURNOVER TESTING. Customer or Customer's designated representative
shall have a period of sixty (60) calendar days commencing on Turnover
to conduct Seller-specified testing procedures: (i) Operations Testing;
(ii) testing of the information, data and signaling flows to and from
the Product and Customer's existing systems ("SYSTEM TESTING"); and
(iii) testing the Product for the transmission, processing and
switching of high-volume operational data in a production-simulated
environment. Seller promptly shall correct any defects identified by
Customer during such sixty (60) calendar day period.
(d) SWITCH PRODUCT ACCEPTANCE. "ACCEPTANCE" of a Switch Product shall occur
only when Customer notifies Seller in writing that: (i) Cutover has
occurred; and (ii) Seller has provided to Customer all deliverables
relating to that Product in accordance with the terms of this Agreement
and the applicable order. In the event Acceptance is not achieved
within ninety (90) calendar days following commencement of the
applicable post-Turnover testing period, Customer shall have the right
to: (iii) continue testing the Product in accordance with the terms of
this SECTION 1.37; or (iv) declare a material breach of this Agreement
and, at its option, seek the rights and remedies available to it under
SECTION 1.23.
(e) ACCEPTANCE OF NON-SWITCH PRODUCTS. Acceptance of non-switch Products
shall occur upon the Delivery Date of such Product.
1.38 INSURANCE:
Seller shall maintain in effect at all times during the term of this Agreement
insurance with a carrier with an A.M. Best rating of A-(XII) or better. Such
insurance shall include, without limitation, worker's compensation in statutory
amounts, comprehensive general liability
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(including products/completed operations coverage) and automobile insurance in
amounts not less than Two and One-Half Million Dollars ($2,500,000) per
occurrence and Five Million Dollars ($5,000,000) annual aggregate for all claims
against all losses, claims, demands, proceedings, damages, costs, charges and
expenses for injuries or damage to any person or property arising out of or in
connection with this Agreement that are the result of the fault of Seller or its
employees, agents or subcontractors and shall designate Customer and its
Affiliates as "additional insureds." On or before the Effective Date and
thereafter upon Customer's reasonable request, Seller shall provide Customer
with a certificate of insurance evidencing such coverage, which shall also state
that Customer shall be provided a minimum of thirty (30) calendar days' prior
written notice of any proposed cancellation, expiration without renewal or
proposed change in carriers or coverage.
1.39 SUPPORT AND MAINTENANCE:
During the Term, Seller shall make available to Customer support and maintenance
services in accordance with Seller's standard operating practices and procedures
including, without limitation, providing to Customer, at no additional cost,
Class A change notices.
2. ARTICLE II
PROVISIONS APPLICABLE TO LICENSED MATERIALS
2.1 LICENSE FOR LICENSED MATERIALS:
(a) Upon delivery of Licensed Materials pursuant to this Agreement, Seller
grants to Customer a perpetual, nontransferable (except as provided in
SECTION 1.22), and nonexclusive license to Use Software that
constitutes Licensed Materials on a Designated Processor in the United
States for its own business operations. No license is granted to
Customer to Use the Licensed Materials outside the United States or to
sublicense such Licensed Materials furnished by Seller. Customer shall
not reverse engineer, decompile or disassemble Software furnished as
object code to generate corresponding Source Code. Unless otherwise
agreed in writing by Seller, Customer shall not modify Software
furnished by Seller under this Agreement. If the Designated Processor
becomes temporarily inoperative, Customer shall have the right to Use
Software that constitutes the Licensed Materials temporarily on a
backup processor until operable status is restored and processing on
the backup processor is completed.
(b) Customer shall not copy Software embodied in Firmware. Except as
otherwise permitted under this Agreement, Customer shall not make any
copies of any other Licensed Materials except as necessary in
connection with the rights granted hereunder. Customer shall reproduce
and include any Seller copyright and proprietary notice on all such
necessary copies of the Licensed Materials. Customer shall also mark
all media containing such copies with a warning that the Licensed
Materials are subject to restrictions contained in an agreement between
Seller and Customer and that such Licensed Materials are the property
of Seller. Customer shall maintain records of the number and location
of all copies of the Licensed Materials. Customer shall take
appropriate action,
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by instruction, agreement, or otherwise, with the persons permitted
access to the Licensed Materials so as to enable Customer to satisfy
its obligations under this Agreement. If Customer's license is canceled
or terminated, or when the Licensed Materials are no longer needed by
Customer, Customer shall return all copies of such Licensed Materials
to Seller or follow written disposition instructions provided by
Seller.
2.2 CHANGES IN LICENSED MATERIALS:
Prior to shipment, Seller at its option may at any time modify the
Specifications relating to its Licensed Materials, provided the modifications,
under normal and proper Use, do not adversely affect the Use, function, or
performance of the ordered Licensed Materials, as determined by Customer in its
reasonable discretion. Unless otherwise agreed in writing, such substitution
shall not result in any additional charges to Customer with respect to licenses
for which Seller has quoted fees to Customer.
2.3 CANCELLATION OF LICENSE:
Notwithstanding any other section in this Agreement to the contrary, if Customer
fails to comply with any of the material terms and conditions of this Agreement
with respect to the Use of Licensed Materials, and such failure is not corrected
within thirty (30) days of receipt of written notice thereof by Customer,
Seller, upon written notice to Customer, may cancel any affected license for
Licensed Materials without further notification.
2.4 OPTIONAL SOFTWARE FEATURES:
Software provided to Customer under this Agreement may contain optional features
which are separately licensed and priced. Except for the RTU features described
in SECTION A-1.11 of the Addendum, for which prior authorization is not
required, customer understands and agrees that such optional features will not
be activated without written authorization from Seller and Customer's payment of
the appropriate license fees. If, in spite of Customer's best efforts to comply
with this restriction, such features are activated, Customer agrees to so notify
Seller within five (5) business days from the date of Customer's knowledge that
such features were activated and to pay Seller the current license fees charged
by Seller for the activated features, as well as the reasonable cost of money
for the period in which such features were activated.
2.5 ADDITIONAL RIGHTS IN LICENSED MATERIALS:
(a) Upon thirty (30) days advance written notice, Customer may relocate the
Software permanently to a new processor of Customer. This new processor
shall then become the Designated Processor in lieu of the former
Designated Processor.
(b) Customer may make and retain an archival copy of the Software for as
long as such Software is relevant to Customer's operations.
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2.6 INSTALLATION OF SOFTWARE:
(a) Where Customer is responsible for Software installation, Seller's sole
responsibility is to deliver the Software to Customer on or before the
scheduled Delivery Date agreed to by Seller. However, if the order
specifies that Seller is responsible for such installation, Seller
shall deliver the Software to Customer in sufficient time for it to be
installed on or before the scheduled Installation Complete Date agreed
to by Seller, and Seller shall complete its installation and associated
testing on or before such date.
(b) Where Customer has assumed responsibility for the installation of newly
licensed Software and in the event that Customer encounters
installation difficulties, at Customer's request, Seller will, at the
Service Rate, provide technical assistance.
2.7 MODIFICATIONS BY CUSTOMER TO USER CONTROLLED MODULES:
Customer may add to, delete from, or modify user-controlled Software modules or
menus as contemplated in the Seller's Related Documentation. Such changes or
modifications, however extensive, shall not affect Seller's title to the
licensed Software. Seller shall have no liability for Customer's errors in
making such changes or modifications.
2.8 ADDITIONAL SOFTWARE RIGHTS FOR 5ESS(R) SWITCH LICENSED MATERIALS:
The following provisions also apply to the granting of licenses by Seller to
Customer for 5ESS(R) Switch Licensed Materials.
(a) Customer may transfer its right-to-use 5ESS(R) Switch Software
furnished under this Agreement without the payment of an additional
right-to-use fee by transferee, except where size-sensitive units are a
factor. Such transfer can be made to an end user for their own internal
use and only under the following conditions:
(i) Such software shall be used only within the United States;
however, Seller will not unreasonably withhold its consent to
Use outside the United States provided that, in the sole
opinion of Seller, the proprietary information associated with
the Use can be adequately protected and any other reasonable
concerns of Seller are adequately addressed;
(ii) Except as otherwise provided in the Agreement, the right to
use such Software may be transferred only together with the
5ESS(R) Switch Product with which Customer has a right to use
such Software, and such right to use the Software shall
continue to be limited to Use with such Product;
(iii) Before any such Software shall be transferred, Customer shall
notify Seller of such transfer and the transferee shall have
agreed in writing (a copy of which will be provided to Seller
at its request) to keep such Software in confidence and to
comply with corresponding conditions respecting Use of
Licensed Materials as those imposed on Customer; and
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(iv) Within the United States, the transferee shall have the same
right to Software warranty or Software maintenance for such
Software as Customer, provided the transferee continues to pay
the fees, if any, associated with such Software or Software
maintenance.
(v) In no event shall such transfer be made to any competitor of
Seller who is in the business of manufacturing comparable
systems or to any other party who presents a competitive or
strategic conflict to Seller.
(b) Upon advance written notice to Seller, Customer may remove 5ESS(R)
Switch Software or optional feature packages, which Customer has the
right to Use under this Agreement from one Customer-owned 5ESS(R)
Switch Product and relocate them to another Customer-owned 5ESS(R)
Switch Product. Customer shall not be required to pay additional
right-to-use fees as a result of such relocation, except where size
sensitive units are a factor. Seller may charge Customer for services
requested by Customer in support of such relocation. Such Software
shall not be used or transferred to Customer's Affiliate that is a
manufacturer of telecommunication products in direct competition with
Seller.
(c) If Seller ceases to maintain a standard, supported version of Software
for the 5ESS(R) Switch Product furnished pursuant to this Agreement,
and these support services are not available from another entity
(either working with or independently from Seller), then Seller shall
furnish Customer, under a confidentiality agreement reasonably
acceptable to Seller, Seller's then-existing Software Source Code,
Software development programs, and associated documentation for such
standard version to the extent necessary for Customer to maintain and
enhance for its own use the standard version of that Software which it
has the right to use under this Agreement.
3. ARTICLE III
PROVISIONS APPLICABLE TO ENGINEERING,
INSTALLATION AND OTHER SERVICES
GENERAL: The provisions of this ARTICLE III shall apply to the Services ordered
by Customer and furnished by Seller under this Agreement.
3.1 SITE REQUIREMENTS:
(a) Customer is solely responsible for ensuring that the installation site
is compliant with any site requirements identified by Seller for the
installation and/or operation of any Products, Licensed Materials, or
Services furnished by Seller under this Agreement. Such site
requirements shall include, without limitation, those site requirements
set forth in this SECTION 3.1 below. Seller agrees to cooperate with
Customer to ensure compliance with all site requirements, provided that
such cooperation shall not require Seller to incur any out-of-pocket
costs unless the parties expressly agree otherwise in writing.
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(b) Customer shall be solely responsible for ensuring that the installation
site complies with all applicable laws, orders, and regulations of
federal, state and local governmental entities including, without
limitation, those relating to environmental conditions.
(c) Notwithstanding anything contained in this Agreement to the contrary,
Seller shall have no liability to Customer, its employees, agents, and
customers for any delay by Seller in completion of any installation or
other Service to be provided by Seller under this Agreement if such
delay is attributable to the failure by Customer to comply with any
site requirements or to provide any other items which are the
responsibility of Customer under this ARTICLE III.
(d) The site requirements which are solely the Customer's responsibility
shall include but are not limited to the following:
(i) Participate in a joint site survey with Seller
(ii) Interior space clears ten feet (10') from floor to bottom of
lowest obstruction
(iii) Floor loading (minimum requirements) structural analysis
always required
(iv) Power room 150 lb. per sq. ft
(v) Switch room 100 lb. per sq. ft.
(vi) Floor thickness: in accordance with local seismic requirements
for the equipment
(vii) Conduit access to all floors in building
(viii) Local exchange carrier cable available
(ix) Commercial electrical current
(x) Existing building grounding is 5 ohm or less metered
(xi) Battery room ventilation in accordance with local requirements
(xii) Fire suppression system
(xiii) Freight access for a 48' trailer off loading equipment.
3.2 ADDITIONAL ITEMS TO BE PROVIDED BY CUSTOMER:
(a) Customer will also be responsible for furnishing the items described in
this SECTION 3.2 as required by the conditions of the particular
installation or other on-site Service at no cost to Seller and such
items are not included in Seller's price for the Services. Seller shall
have the right to invoice Customer for any costs or expenses incurred
by Seller as a result of Customer's failure to provide any of these
items described in this SECTION 3.2 and all such invoices shall be paid
by Customer in accordance with this Agreement; provided, however, that
Seller shall only be entitled to invoice Customer for such items if
such items previously were identified in writing as part of the site
survey to be conducted by the parties in accordance with the
requirements set forth in SECTION 3.3.2(A).
(i) Access to Building and Work Site: Customer shall provide
employees of Seller and its subcontractors free access to
premises and facilities at all hours during the scheduled
Service or at such other times as are requested by Seller.
Customer shall obtain for Seller's employees and its
subcontractors' employees any identification and clearance
credentials which are necessary to enable Seller and its
subcontractors to have access to the work site.
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(ii) Site Coordination: At Seller's request Customer shall
coordinate with Customer's subcontractors, property managers,
Regional Bell Operating Company, Local Exchange Carrier and
any other parties and tenants having rights to the work site
or whose participation is necessary in order for Seller to
perform the applicable Services.
(iii) Environmental Conditions: Prior to the Services start date,
Customer shall ensure that the premises will be dry and free
from dust and Hazardous Materials, including but not limited
to asbestos, and that the premises are in such condition as
not to be injurious to Seller's or its subcontractors'
employees or to the Products and Licensed Materials to be
installed. Prior to Services start date and during the
performance of the Services, Customer shall, if requested by
Seller, provide Seller with sufficient data to assist Seller
and its subcontractors in evaluating the environmental
conditions at the work site (including without limitation, the
presence of Hazardous Materials). The price quoted by Seller
for Services does not include the cost of removal or disposal
of the Hazardous Materials from the work site. Customer is
responsible for the removal and disposal in accordance with
applicable laws, rules and regulation of the Hazardous
Materials, including but not limited to asbestos, prior to
commencement of Services.
(iv) Sensitive Equipment: Prior to the Services start date,
Customer shall inform Seller of the presence of any sensitive
equipment at the work site (e.g., equipment sensitive to
static electricity or light).
(v) Repairs to Buildings: Prior to the Services start date,
Customer shall make such alterations and repairs to the work
site as are necessary for proper installation of Products and
Licensed Materials.
(vi) Building Readiness: Prior to the Services start date, Customer
shall provide extraordinary hauling and hoisting services such
as rigging or crane services, if applicable, and shall arrange
for traffic control, if necessary for the delivery of
Products.
(vii) Openings in Buildings: Customer shall furnish suitable
openings in buildings, including, without limitation,
elevators and windows as needed to allow Products to be placed
in position, and shall provide necessary openings and ducts
for cable and conductors in floors and walls as designated on
engineering drawings furnished by Seller. Customer shall
fireproof (with steel covers and as otherwise required by
applicable laws, rules, regulations, and codes) all unopened
paths throughout such buildings.
(viii) Surveys: Prior to the Services start date, Customer shall
provide to Seller (and, if requested by Seller, to Seller's
subcontractors) surveys (describing the physical
characteristics, legal limitations, and utility locations for
the work site) and a legal description of the site.
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(ix) Electrical Current, Heat, Light, and Water: Customer shall, in
amounts no less than that ordinarily furnished for similar
purposes in a working office, provide electric power, run all
leads to Seller's power board; provide temperature control and
general illumination (regular and emergency) in rooms in which
Services are to be performed or Products stored, provide exit
lights; and provide water and other necessary utilities for
the proper execution of Services.
(x) Building Evacuation: Prior to the Services start date,
Customer shall provide building evacuation plans in case of a
fire or other emergency.
(xi) Material Furnished by Customer: Unless expressly stated to the
contrary, Seller's prices do not include costs for any
Customer furnished material nor do they include any Seller
charges for engineering, installation, modification, or repair
Services to Customer furnished material. New or used material
furnished by Customer shall be in such condition that it
requires no repair and no adjustment or test effort in excess
of that normal for new equipment. Customer assumes all
responsibility for the proper functioning of such material.
Customer shall also provide the necessary technical assistance
and information for Seller to properly install such material.
(xii) Floor Space and Storage Facilities: Customer shall provide,
for the duration of Services, suitable and easily accessible
floor space and storage facilities to permit storing of
Products and other material, tools and other property of
Seller and its subcontractors in close proximity to where they
will be used. Where the Services are to be performed outside
of a building or in a building under construction, Customer
shall, in addition to the above requirements, permit or secure
any necessary permission for Seller and its subcontractors to
maintain at the work site, storage facilities for Products,
material, tools, and equipment needed to complete the
Services. As appropriate Customer shall provide Seller's and
its subcontractors' personnel access to toilet facilities.
(xiii) Easements, Permits, and Rights of Way: Customer shall secure
prior to the Services start date and shall maintain for the
duration of the Services all rights-of-way, easements,
licenses, and permits and such other rights and approvals as
are necessary to enable Seller to perform the Services
including, without limitation, all construction and building
permits for work to be performed at the work site and other
areas ancillary to the work site such as sidewalks, streets,
alleys, and highways.
(xiv) Security Service: Customer shall provide such levels of
security as are necessary to prevent admission of unauthorized
persons to building and other areas where installation
Services are performed and to prevent unauthorized removal of
the Products and other materials. Seller will inform Customer
as to which storage facilities at the work site Seller will
keep locked. Such storage facilities will remain closed to
Customer's building surveillance.
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(xv) Access to Existing Equipment: Customer shall permit Seller
reasonable use of such portions of the existing equipment as
are necessary for the proper completion of such tests as
require coordination with existing equipment. Such use shall
not interfere with Customer's normal maintenance of equipment.
(xvi) Grounds: Customer shall provide access to suitable and
isolated building ground as required for Seller's standard
grounding of equipment. Where installation is performed
outside or in a building under construction, Customer shall
also furnish lightning protection ground.
(xvii) Requirements for Customer Designed Circuits: Customer shall
furnish information covering the proper test and readjust
requirements for apparatus and shall furnish requirements for
circuit performance associated with circuits designed by
Customer or standard circuits modified by Customer's drawings
such as alarm and environmental circuits.
(xviii) Cross-Connecting Main Distributing Frames and Installing Heat
Coils: Customer shall install such cross-connections and heat
coils as are necessary in connection with the Services.
(xix) Clearing Equipment for Modifications: Customer shall remove
cross-connections, transfer service on trunks and sundry
working equipment, and make other arrangements required to
permit Seller to modify existing equipment.
(b) In the event the joint site survey conducted by the parties pursuant to
SECTION 3.3.2(A) determines that the necessary requirements are not met
at the commencement of the installation of the Products and the
Customer needs to arrange for alterations and/or repairs, the order
will be placed on hold until such time as requirements are met. During
such interval, Seller reserves the right to determine any schedule and
price impacts or, to treat such Product as Bill and Hold.
3.3 ITEMS TO BE FURNISHED BY SELLER:
3.3.1 ENGINEERING:
(a) General Review: Seller will review the following items as Seller deems
appropriate; switching Products (Products and Software); transmission
Products (Products and Software); power/energy equipment hardware;
engineering drawings; site survey; grounding of the switch; appliance
outlets; front and rear aisle lighting as required; timing cables;
distributing frame engineering and equipment; cable rack and hardware;
stanchions; end guards auxiliary framing; existing cable holes; fiber
cable protection systems.
(b) Needs Analysis: Seller will perform a needs analysis of the Telephone
Equipment Order (TEO) and Customer's specified requirements to
determine the equipment solution that meets those requirements.
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(c) Records: Upon the Installation Complete Date, Seller will turn over to
Customer a complete set of records. Such records include but are not
limited to wiring lists, front equipment drawings, assignment drawings,
and interface schematics.
3.3.2 INSTALLATION:
(a) Site Survey: Prior to the commencement of installation Services, Seller
and Customer will perform a joint site survey to determine whether the
installation site meets the site requirements referenced in SECTION 3.1
and whether Customer has provided the items in SECTION 3.2. Should
Seller determine that the site does not comply with such site
requirements or that Customer has not provided any item required under
SECTION 3.2, Seller shall specify such deficiencies to Customer in
writing. Seller and Customer shall jointly agree on a course of action
to correct such deficiencies prior to the start of installation
Services. During the joint site survey, Seller and Customer shall also
jointly agree upon the layouts and arrangements for the Products and
Licensed Materials to be installed. Upon the start of installation all
changes shall be subject to additional charges.
(b) Method of Procedure: Seller shall prepare a detailed method of
procedure ("MOP") and review with Customer before starting work.
Customer shall review the MOP prepared by Seller and shall give Seller
written acceptance of the MOP by signing a copy thereof prior to the
Services start date. Any changes to the MOP requested by Customer shall
be agreed upon subject to the Change Order process.
The MOP shall contain the following details:
(i) A concise statement that covers the installation Services to
be performed including the equipment that will be affected and
the hours that such Services are to be performed;
(ii) Specific responsibilities of Seller and Customer;
(iii) Service protection procedures that include general service
protection rules and special service precautions for the
specific project;
(iv) A time and release schedule of the work operations involving
working equipment and/or circuits in service;
(v) A method of identifying equipment and cabling to ensure that
the circuits are "cleared" before start of work;
(vi) A detailed account of the work operations that the installer
will follow;
(vii) The methodology to be used to halt installation Services if
trouble occurs and a general procedure to correct/resume work
operations;
(viii) Provide environmental safety concerns, if applicable; (ix)
Obtain Customer signature.
(c) Warehousing, Delivery, Receipt & On-site Storage of Equipment, and
General Cleaning: Seller will stage the delivery of Products. Seller's
personnel will be on-site at the time the Products are delivered. Such
personnel will accept the Products, unpack for inventory purposes and
inspect such Products for damage. Seller promptly will resolve all
shipping errors inventory discrepancies and damage issues. This
function shall be performed
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in an area previously designated for the storage and unpacking of
equipment and Product(s). Such area will be selected based on a
location that minimizes movement of material and personnel through the
work site. In the event storage is limited or inadequate temporary
storage facilities such as trailers or containers may be required. Any
fees associated with the procurement of temporary storage facilities
are not included in Seller's quoted prices and shall be solely the
responsibility of Customer. Materials such as plywood or masonite will
be utilized as necessary, to prevent cable reels, iron work and other
heavy objects from damaging floors, walls and doors. Seller shall
perform general cleaning of the equipment and storage areas (e.g.
clearing floors of debris, packing material, etc.) on a regular basis
throughout the installation period. Rubbish shall be disposed of at
Seller's expense and in compliance with local requirements.
(d) Hardware Assembly: Hardware assemblies and overhead cable rack, iron
work and conduit (collectively "Components") will be delivered for
specific bays and cabinets as identified in the firm price quote
provided or in the applicable Statement of Work. Unless included in the
SOW, additions of these components to provide access to other locations
(i.e. power rooms, computer rooms, distributing frames not located with
Products, or Products located on separate floors) will be specifically
excluded from the installation Services. Such additions will only be
included in the installation Services for an additional charge. Seller
will place and secure all ordered Products in the location specified in
the engineering specifications. Such activity includes but is not
limited to:
(i) Mark and drill floors
(ii) Assemble and place floor-mounted Products
(iii) Assemble distribution frames
(iv) Erect frames
(v) Align and junction frames
(vi) Install end guards and covers
(vii) Assemble and install fiber protection ductwork
(viii) Mount units and apparatus
(ix) Place batteries
(x) Seller will also erect supporting hardware compatible with
purchased Products. Such activity includes but is not limited
to:
(xi) Fabricate and install cable racks, bars, rod or stations as
identified in the applicable Statement of Work
(xii) Erect ladder rack and ladders
(xiii) Open and close existing cable holes and slots. Any new cable
to facilitate Products designs the responsibility of the
Customer
(xiv) Fabricate and install framing aisle lighting conduit and
fittings
(xv) In addition, Seller will place and designate connecting
appliances (MDF terminal blocks, DSX panels, etc.) provided
with order, such as but not limited to:
(xvi) Stamp and/or affix aisle, shelf and unit designations
(xvii) Mount and stencil terminal strips
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(xviii) Seller will also extend lighting, A/C circuits and grounding
to include added Products if Products is ordered in job
specification. Such activities include but are not limited to:
(xix) Assemble and install lighting fixtures (xx) Install switches
and receptacles
(e) Cable and Wire: For cable and wire to be installed by Seller, Seller
will run, tag, and secure metallic and fiber optic cables in an
unobstructed environment a maximum of one hundred (100) feet and power
cables a maximum of fifty (50) feet for the Products and apparatus
(this specifically excludes primary power cables, except on power
equipment orders) identified in the Product order or applicable
Statement of Work. Seller will wire, attach, terminate and affix all
cable and wire including fiber optic cables supplied with purchased
Products. This may include but is not limited to mechanical wire
wrapping, soldering, crimping, plugging in of pre-terminated cables or
polishing of fiber optics for purchased Product. Seller will run alarm
cabling, terminate and test for the identified equipment including
Customer provided environmental scan points of fire detection and door
entry which are less than fifty (50) feet away and pre-terminated.
Seller will verify all copper wiring placed by the Seller for
continuity to detect and analyze opens, shorts, reversals, and
incorrect wiring. Where pairs, quads or groupings are indicated, the
grouping will be verified. Seller will ensure the functionality and
integrity of all fiber directly associated with the installed Products
and the fiber optic cables installed by Seller within the building
structure. Seller will "dress" all cabling and wiring and provide
physical protection. Seller will properly protect cables at all
"break-off" locations, such as the vertical turns from the overhead
cable rack to bay frame work.
(f) Testing: Specific test procedures are dependent upon the type of
Product installed and are identified in the installation guide for the
particular product. To ensure that technical design and performance
criteria are being met, testing shall be performed by Seller to obtain
an evaluation of the functional, operational, electrical and mechanical
integrity of all Products installed by Seller. In general the following
tests are required for all Product types furnished and installed by
Seller; Seller's activities associated with testing will include, but
not be limited to the following:
(i) Turn on and verify power to installed Products
(ii) Load Product Software and default parameters required to
conduct local unit loop-back testing to demarcation points.
(iii) Run and connect test specific cross-connects. Remove upon
completion of test(s).
(iv) Perform all unit and system-level tests to ensure Products
pass system and technician evoked diagnostics
(v) Test functionality of circuit packs required by job, at time
of original installation, within the installed unit. Testing
of spares is specifically excluded and will be included only
for an additional charge.
(vi) Test functionality and integrity of Seller-installed local
alarms.
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(vii) Resolve troubles encountered with Products purchased on order.
Refer to Customer any trouble found in Customer-provided
equipment.
(viii) Maintain test logs and trouble reports and turn over to
Customer.
(g) Seller will perform the following Turnover procedures for all
installation Services provided by Seller:
(i) Inform Customer of completion of installation cycle
(ii) Provide Customer with all drawings, invoices, logs and test
results.
(iii) Remove from Customer premises tools and scrap generated from
installation effort.
(iv) Issue job completion notice to Customer.
3.4 ACCEPTANCE OF SERVICES:
All installation Services shall be considered complete and ready for acceptance
by Customer on the later to occur of: (i) Acceptance of the Product and/or
Licensed Materials to which the Services relate; and (ii) upon completion of all
installation Services, including any follow-up items identified by Customer.
Upon completion of the installation, Seller will submit to Customer a notice of
completion or, if Customer has elected advance-turnover of subsystems, a notice
of completion of advance-turnover.
3.5 WORK OR SERVICES PERFORMED BY OTHERS:
Work or services performed at the site by Customer or its other vendors or
contractors shall not interfere with Seller's performance of Services. Seller
shall have no responsibility or liability with respect to such work or Services
performed by others. If Customer or its other vendors or contractors fail to
timely complete the site readiness or if Customer's or its other vendors' or
contractors' work interferes with Seller's performance, the scheduled completion
date of Seller's Services under this Agreement shall be extended as necessary to
compensate for such delay or interference.
4. ARTICLE IV
ENTIRE AGREEMENT
4.1 ENTIRE AGREEMENT:
The terms and conditions contained in this General Agreement supersede all prior
oral or written understandings between the parties with respect to the subject
matter hereof and constitute the entire agreement between the parties with
respect to such subject matter. The preprinted terms and conditions on
Customer's purchase orders or Seller's sales forms are deleted, but only to the
extent that such terms and conditions are inconsistent with the terms of this
Agreement. The typed or handwritten provisions of an order which are consistent
with the terms of this General Agreement along with the terms of this General
Agreement shall constitute the entire Agreement between the parties relating to
said order.
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IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
their duly authorized representatives on the date(s) indicated.
Lucent Technologies Inc. Allegiance Telecom, Inc.
By: /s/ DANA CROWNE By: /s/ EDMUND J. ROMEO
- -------------------------------- --------------------------------
Name: Dana Crowne Name: Edmund J. Romeo
--------------------------- ------------------------------
Title: Senior Vice President and Title: Director, Controller &
Chief Officer Management
-------------------------- -----------------------------
Date: 10/16/97 Date: 10/16/97
--------------------------- ------------------------------
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EXHIBIT 1
INVOICE
INVOICE NUMBER
----------------
INVOICE DATE
------------------
ACCOUNT NUMBER
----------------
PAGE NUMBER
-------------------
SHIP TO: BILL TO:
<TABLE>
<CAPTION>
CUSTOMER P.O.# LUC REFERENCE# CUSTOMER CODE TERMS CONTRACT# FOB
------------------- ------------------ ------------- --------- ------------------ ----------
ITEM LUCENT BILL OF QUANTITY QUANTITY
NO. ORDER SHIP DATE SHIP METH LADING# PART NUMBER/DESCRIPTION ORDERED SHIPPED UNIT PRICE PM TOTAL PRICE
- ---- -------- --------- --------- ------- ----------------------- -------- -------- ---------- ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 J7888KK 2/2/00 5ESS Material 1 $25,000.00 E $25,000.00
2 J7888KK 2/2/00 Spares 1 $ 5,000.00 E $ 5,000.00
3 J7888KK 2/2/00 Engineering $ 2,000.00 $ 2,000.00
4 J7888KK 2/2/00 Installation $ 4,000.00 $ 4,000.00
[DELETED TRANSPORTAION]
QUESTIONS ABOUT YOUR ACCOUNT? MAKE CHECK PAYABLE TO: INVOICES AR PAYABLE SUBTOTAL $36,000.00
CALL: Lucent Technologies Inc. IN U.S. CURRENCY AND LESS ADVANCE PAYMENT $ 9,250.00
P.O. Box 100317 OVERDUE AMOUNT SHALL TAX
Atlanta, GA 30384-0317 BEAR INTEREST AT A REASONABLE TOTAL DUE $27,750.00
REMARKS Attn: Accounts Receivable RATE OR IS SUBJECT TO LATE
PAYMENT CHARGES PER AGREEMENT
</TABLE>
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EXHIBIT 2
ADDENDUM
[DOCUMENT CONSISTING OF 6 PAGES ATTACHED HERETO]
PRODUCT PURCHASE ADDENDUM ONE
TO THE
GENERAL AGREEMENT
BETWEEN
ALLEGIANCE TELECOM, INC.
AND
LUCENT TECHNOLOGIES INC.
This Addendum One to Contract Number LNM101697DASAT (hereafter "ADDENDUM") is
made this 16th day of October, 1997 ("EFFECTIVE DATE"), by and between
Allegiance Telecom, Inc., a Delaware corporation, with offices at 1950 Stemmons
Freeway, Suite 3026, Dallas, TX 75207 (hereafter "CUSTOMER"), and Lucent
Technologies Inc., a Delaware corporation, acting through its Network Systems
group, with offices located at 600 Mountain Avenue, Murray Hill, NJ 07974
(hereafter "SELLER").
WHEREAS, Customer and Seller have entered into a General Agreement (Contract
Number LNM101697DASAT) (hereafter "AGREEMENT" or "GENERAL AGREEMENT") setting
forth the terms and conditions pursuant to which Seller agrees to sell and
Customer agrees to buy Seller's Products, Licensed Materials and Services; and
WHEREAS, Customer and Seller desire to simultaneously enter into this Addendum
to govern certain conditions relating to the purchase or license for use by
Customer of Seller's 5ESS(R) Switch Products, Transmission and Access Products,
and related Licensed Materials.
NOW THEREFORE, in consideration of the mutual promises hereinafter set forth and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties agree as follows:
A-1.1 SCOPE OF ADDENDUM
This Addendum shall govern any purchase order placed by Customer during the Term
for Seller's 5ESS(R)-2000 Products and Transmission and Access Products, and
related Licensed Materials. This Addendum is issued pursuant to and incorporates
the non-conflicting terms and conditions of the General Agreement. In the event
of any conflict or inconsistency between the terms of this Addendum and the
terms of the General Agreement, the terms of this Addendum shall prevail.
A-1.2 DEFINITIONS
For purposes of this Addendum, the definitions set forth below will apply. Other
capitalized terms used in this Addendum shall have the meanings ascribed to them
herein or, if not defined herein, then as defined in the Agreement.
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(a) "5ESS(R)-2000 PRODUCTS" means the 5ESS(R)-2000 Switch, Growth and related
Licensed Materials including, without limitation, Base Software.
(b) "5ESS(R)-2000 SWITCH" means any 5ESS(R)-2000 system containing, at a
minimum, an Administrative Module (AM), Communications Module (CM), and at
least one (1) switch module. Any such switch can act as a host for
Optically Remote Modules ("ORMS"), Remote Switch Modules ("RSMS") and/or
Extended Switch Modules ("EXMS").
(c) "BASE SOFTWARE" means the operating system and related Software, and
operations, administration and maintenance features and functions, for all
Seller's switch-based platforms.
(d) "EXCLUSIVITY PERIOD" means the three (3) year period following the
Effective Date.
(e) "GROWTH" means any 5ESS(R)-2000 hardware or software not purchased with the
associated 5ESS(R)-2000 Switch required to support the expansion of such
5ESS(R)-2000 Switch.
(f) "PERIPHERALS" means hardware and/or Software extensions added subsequent to
the installation of the Initial 5ESS(R)-2000 Switch or Switch Module/Switch
Module 2000.
(g) "SWITCH MODULE" means a Module Control/Time Slot Interchange Unit along
with a number of Peripheral units added to an embedded 5ESS(R)-2000 Switch
or to an existing Remote Switch Module site and related Software.
(h) "TOTAL PAID DIRECT PURCHASES" means all Customer purchases under this
Addendum of Seller Products for which Seller has received payment,
including hardware, Software, engineering, installation, training and
documentation which have been purchased from Seller without the
intervention of any third party, including but not limited to distributors
or resellers.
(i) "TRANSMISSION AND ACCESS PRODUCTS" means a DDM-2000 OC-1 Fiber Reach
Multiplexer, DDM-2000 OC3 Multiplexer, DDM-2000 OC-12 Multiplexer,
SLC(R)-2000
A-1.3 CUSTOMER EXCLUSIVITY COMMITMENT
In consideration for the discounts, allowances and incentives set forth in this
Addendum, except as otherwise provided herein with respect to the US One Assets,
Customer agrees to directly and exclusively procure from Seller all of
Customer's requirements for Class 3, 4, 5 central office switching equipment
(excluding any functionality not supported by the 5ESS(R)-2000 Products) and the
then-current Base Software releases for such switches during the Exclusivity
Period.
In the event Seller is unable to meet its obligations to supply Products and/or
related Licensed Materials within the Standard Order Interval, Customer shall
have the right, at its option, to procure functionally comparable equipment
and/or software from another source; provided, however, that such procurement
shall not be argued or construed to constitute a waiver of any other rights and
remedies Customer may have with respect to Seller's failure to supply such
Products and/or related Licensed Materials within the Standard Order Interval.
If, during the Exclusivity Period: (a) Customer purchases any Class 3, 4, 5
central office switching equipment (excluding any functionality not supported by
the 5ESS(R)-2000 Products) other than 5ESS-2000 Switches purchased directlY from
Seller (excluding the US One Assets), or (b) Customer fails to obtain financing
as provided in SECTION 1.35, AGREEMENT, and Customer elects to terminate the
exclusivity commitment herein, Seller reserves the right to discontinue
discounts, allowances and incentives set forth herein for all future orders
placed under this Addendum and such future orders shall be priced at the
applicable Price less the applicable Growth discount. Notwithstanding anything
contained herein to the contrary, Customer's exclusivity obligations as
described herein shall not apply to any entity that becomes an Affiliate of
Customer following the Effective Date.
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Any purchase order placed pursuant to this Addendum will reference Contract
Number LMN101697DASAT to qualify for the discounts, allowances and incentives
incorporated herein. The applicable merchandise class for Seller's 5ESS(R)-2000
Products, Transmission and Access Products, Power Products and related Licensed
Materials shall determine the applicable discount level. Engineering and
installation Services are excluded from discounted pricing in this Addendum.
A-1.4 ANNUAL FORECAST
By the first day of each calendar quarter occurring during the Term, Customer
will submit in writing a current forecast of its planned purchases from Seller
under this Addendum which forecasts shall include, without limitation, type,
quantity and anticipated ship date. Such forecasts will be a twelve (12) month
view of all prospective purchases by month and consistent with Seller's Standard
Order Interval. Customer will submit such forecasts to Seller's Account
Executive at the following address:
Mr. Robert Schewe, Account Executive
Lucent Technologies, Inc.
Room 52K09
2600 Warrenville Rd
Lisle, IL 60532-3640
Customer will designate an authorized representative to coordinate the ordering
and distribution of Products and Licensed Materials and to interface with
Seller's Account Executive as needed.
A-1.5 PRICING PLAN FOR 5ESS(R)-2000 SWITCHES
In consideration of the exclusivity commitments set forth in SECTION A-1.3,
Seller will provide the following discounts off the applicable Price for all
purchases of the following 5ESS(R)-2000 Products made by Customer directly from
SelleR during the Term.
5ESS(R)-2000 DISCOUNT TABLE
<TABLE>
<CAPTION>
- ----------------------------- ----------------------- --------------------------- ----------------- -----------------------
SWITCH TYPE INITIAL SWITCH GROWTH SWITCH DISCOUNT DISCOUNTS FOR DISCOUNTS FOR
DISCOUNT DURING DISCOUNT PERIODS SWITCH MODULES PERIPHERALS
- ----------------------------- ----------------------- --------------------------- ----------------- -----------------------
<S> <C> <C> <C> <C>
5ESS(R)-2000 Switch* 85% 85% 65% 30%
- ----------------------------- ----------------------- --------------------------- ----------------- -----------------------
RSM/ORM/EXM 80% 80% 65% 30%
- ----------------------------- ----------------------- --------------------------- ----------------- -----------------------
</TABLE>
* Customer will receive an initial credit of One-Hundred Thousand Dollars
($100,000) against the purchase price of the first switch acquired hereunder.
For each initial switch Product ordered by Customer, Customer shall be afforded
the Initial Switch Discount. In addition, Customer shall be afforded Growth
switch discounts during two (2) discount periods of nine (9) months each
("DISCOUNT PERIODS"). Each Discount Period will commence upon receipt by Seller
of Customer's written notice. During each Discount Period, the initial Growth
switch discount shall be eighty-five percent (85%) for all purchase orders for
5ESS(R)-2000 Switch Growth, and eighty percent (80%) for RSM/ORM/EXM Products.
For any purchase orders not placed during the Discount Periods, the following
discounts for 5ESS(R)-2000 Switch and RSM/ORM/EXM shall apply: (a) Switch
modules discounts shall be sixty-five percent (65%); and (b) Peripherals
discounts shall be thirty percent (30%).
5ESS-2000 Switch Software will be discounted: (a) eighty-five percent (85%)
during Discount Periods, and (b) thirty percent (30%) outside of Discount
Periods, provided that any Software deployed on a full network basis is eligible
for an additional net twenty-five percent (25%) discount for a total discount of
forty-seven and one-half percent (47.5%). Seller shall audit Customer, pursuant
to SECTION A-1.11, on an annual basis and upon fourteen (14) days advance
written notice to Customer.
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Seller and Customer will develop a mutually agreed upon schedule of components
and standardized configurations with associated list prices and billable amounts
(including ancillary equipment) which will be used as the basis for all initial
switch purchase orders. It will be Seller's responsibility to maintain this unit
price list and to communicate any changes or additions to Customer in the
future. All information included on such unit price lists shall be consistent
with the terms set forth in the Agreement including, without limitation, the
terms set forth in SECTION 1.8 of the Agreement.
A-1.6 PRICING PLAN FOR SWITCH SOFTWARE RELEASES
For purposes of this section, the fees for Base Software releases shall mean the
Software Right-to-Use (RTU) and Office Data Administration (ODA). During the
Term, Customer's purchase of an initial 5ESS(R)-2000 Switch will include the
then-current Base Software release. However, if Customer orders an initial
5ESS(R)-2000 Switch which is shipped within forty-five (45) days prior to the
published general availability date of the next Base Software release, Seller
will provide such Base Software release upgrade at no charge. Additional Base
Software releases licensed by Customer will be at a cost of Eighty Thousand
Dollars ($80,000) per initial 5ESS(R)-2000 host/standalone switch for Base
Software release upgrades. Customer will be responsible for all engineering
charges associated with the Base Software release upgrades furnished by Seller
under this Addendum.
A-1.7 PRICING PLAN FOR TRANSMISSION AND ACCESS PRODUCTS
In consideration of the exclusivity commitments set forth in SECTION A-1.3,
Seller will provide the following discounts off the applicable Price for the
following Transmission and Access Products which Customer directly procures from
Seller during the Term. For Transmission and Access Products not shown below,
the parties will mutually agree upon an appropriate discount prior to order
placement.
TRANSMISSION AND ACCESS PRODUCTS DISCOUNT TABLE
<TABLE>
<CAPTION>
-------------------------------------------------------------- ---------------------------------
TRANSMISSION SYSTEMS DISCOUNT
-------------------------------------------------------------- ---------------------------------
<S> <C>
DDM-2000 OC-3 35%
-------------------------------------------------------------- ---------------------------------
DDM-2000 OC-12 35%
-------------------------------------------------------------- ---------------------------------
DDM-2000 FIBERREACH OC-1 35%
-------------------------------------------------------------- ---------------------------------
SLC-2000 CARRIER SYSTEM
-------------------------------------------------------------- ---------------------------------
SLC-2000 BAYS/SHELVES 40%
-------------------------------------------------------------- ---------------------------------
SLC-2000 COMMONS 40%
-------------------------------------------------------------- ---------------------------------
SLC-2000 (POTS/SPOTS) 35%
-------------------------------------------------------------- ---------------------------------
SLC-2000 (SPECIAL CHANNEL UNITS) 35%
-------------------------------------------------------------- ---------------------------------
SLC-2000 SOFTWARE 20%
-------------------------------------------------------------- ---------------------------------
SLC(R) SERIES 5 CARRIER SYSTEM
-------------------------------------------------------------- ---------------------------------
SLC SERIES 5 BAYS/SHELVES 30%
-------------------------------------------------------------- ---------------------------------
SLC SERIES 5 COMMONS 30%
-------------------------------------------------------------- ---------------------------------
SLC SERIES 5 (POTS/SPOTS) 30%
-------------------------------------------------------------- ---------------------------------
SLC SERIES 5 (SPECIAL CHANNEL UNITS) 30%
-------------------------------------------------------------- ---------------------------------
DACSII CEF and ISX Digital Access Cross Connect 25%
-------------------------------------------------------------- ---------------------------------
DACS IV Digital Access Cross Connect 30%
-------------------------------------------------------------- ---------------------------------
FT 2000 OC-48 Lightwave Products 30%
-------------------------------------------------------------- ---------------------------------
MSDT (Multi Services Distant Terminal) 25%
-------------------------------------------------------------- ---------------------------------
</TABLE>
A-1.8 5ESS(R) SWITCH TRAINING INCENTIVE
In consideration of the exclusivity commitments set forth in SECTION A-1.3,
Seller will provide fifteen (15) tuition-free days of training for each
5ESS-2000 Switch host; for each RSM/ORM/EXM purchased by Customer, Seller will
provide an additional six (6) tuition-free days of training. This training may
be used any time during the first twelve
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(12) months after installation of the applicable switch. Customer is responsible
for all associated travel and living expenses for Customer personnel. Seller, at
its option, shall offer training regionally at the Dublin or Hickory Ridge
Training Centers. While Seller recommends core courses from its Customer
Training Catalog, any 5ESS(R)-2000 Switch-related courses may be taken at
Customer's discretion.
A-1.9 FIVE FACILITY ACCESS INCENTIVE
In consideration of the exclusivity commitments set forth in SECTION A-1.3,
Seller will provide Customer access to Seller's Feature Interactive Verification
Environment ("FIVE") facility in Lisle, Illinois, so that Customer may test the
following: new Seller features, verification of new applications, and simulation
of call scenarios. Customer may use such facility on a billable basis to
integrate equipment for Customer-specific applications, subject to Seller's
general agreement respecting use of that facility. Such access is given on a
reservation basis. Customer agrees to be reasonable in its requests for
reservations and will provide reasonable notice of any cancellation.
A-1.10 MARKETING DEVELOPMENT FUND ALLOWANCE
In consideration of the commitments set forth in SECTION A-1.3, Seller will
allocate twenty-five hundredths of one percent (.25%) of Customer's Total Paid
Direct Purchases for the Marketing Development Fund. This fund will be used to
pay for marketing activities designated solely for Products mutually agreed by
the parties prior to such funding and shall be calculated by Seller on a
quarterly basis during the Term. Customer will use such funding prior to Term
expiration.
A-1.11 FEATURE ACTIVATION AND RECONCILIATION
All 5ESS(R) Switch Software furnished under this Addendum will include at no
additional cost a Feature Activation Counting and Reconciliation Feature. This
feature will be used for the sole purpose of tracking and billing for optional
RTU features which are activated by Customer. Customer agrees that it will
implement such feature in each 5ESS(R) Switch office. The purpose of the
implementation is to facilitate Seller's audit process of RTU features activated
by Customer on an annual basis, with the cooperation of Customer. The Prices and
billing terms set forth in the Agreement shall apply to the results of the
annual audit. Seller agrees that records and information gathered from the
annual audits will be used exclusively for the sole purpose of billing Customer
for activated optional RTU features.
A-1.12 SPECIAL PROVISIONS RELATING TO US ONE ASSETS
Seller agrees that SECTION 1.14, WARRANTY, shall apply to the US One Assets,
provided that the Warranty Period shall commence on the date title is
transferred to Customer. In addition to the warranty set forth in SECTION 1.14,
the following sections shall apply to the US One Assets:
(a) Section 1.4 Customer Responsibility
(b) Section 1.15 Infringement and General Indemnities
(c) Section 1.16 Remedies
(d) Section 1.17 Use of Information
(e) Section 1.21 Force Majeure
(f) Section 2.1 License for Licensed Materials
(g) Section 2.3 Cancellation of License
(h) Section 2.4 Optional Software Features
(i) Section 2.5 Additional Rights in Licensed Materials
(j) Section 2.8 Additional Software Rights for 5ESS(R)
Switch Licensed Materials
With respect to the US One Assets, Seller agrees to provide: (k) at no cost to
Customer the 5E12 Base Software generic release within ninety (90) days after
Seller makes the same generally available to its customers; and (l) Customer all
the pricing benefits set forth in this Agreement including without limitation,
the 5ESS(R) system and Licensed Materials pricing and Growth discounts under
SECTION A-1.5 of the Addendum.
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A-1.13 ENTIRE AGREEMENT
Except as specifically modified, amended or supplemented herein, all terms and
conditions of the General Agreement shall remain in full force and effect. The
terms and conditions contained in this Addendum and those non-conflicting terms
and conditions of the General Agreement supersede all prior oral and written
understandings between the parties and shall constitute the entire agreement
between the parties with respect to the subject matter herein. This Addendum
shall not be modified or amended except by a writing signed by an authorized
representative of both parties.
IN WITNESS WHEREOF, the parties have caused this Addendum to be executed by
their duly authorized representatives on the date(s) indicated.
ALLEGIANCE TELECOM, INC. LUCENT TECHNOLOGIES INC.
By:/s/ DANA CROWNE By:/s/ EDMUND J. RONCO
----------------------------- --------------------------------
Typed Name: Dana Crowne Typed Name: Edmund J. Ronco
--------------------- ------------------------
Title: Senior Vice President Title: Director, Contracting and
-------------------------- -----------------------------
and Chief Engineer Asset Management
-------------------------- --------------------------
Date: 10/16/97 Date: 10/16/97
--------------------------- ------------------------------
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EXHIBIT 3
SELLER'S CHANGE ORDER PROCESS
GLOBAL COMMERCIAL MARKETS (GCM) PROCESS DESCRIPTION
CHANGE ORDER CONTROL PROCESS
LUCENT TECHNOLOGIES
GLOBAL COMMERCIAL MARKETS
CHANGE ORDER CONTROL PROCESS
PREPARED BY: AMANDA FUQUA, KENDALL PORTERFIELD,
DEBORAH MARSH, AND TIM NORMAN
GCM PROJECT MANAGEMENT OFFICE
VERSION: 1.5 -MAY 14, 1997
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Document Administrator: PAGE 1
Deborah L. Marsh (910) 279-3218
Edited by T. A. Norman, D. L. Marsh 05/05/98
Lucent Technologies Proprietary
Use Pursuant To Company Instructions
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<PAGE> 48
GLOBAL COMMERCIAL MARKETS (GCM) PROCESS DESCRIPTION
CHANGE ORDER CONTROL PROCESS
TABLE OF CONTENTS
Section :
1. Purpose/Scope
Process description
2.1. Lucent's Roles and Responsibilities for Controlling Changes
2.2. Individual Roles and Responsibilities
2.2.1. COCP Administrator
Local Change Coordinator
Technical Consultant
2.2.4. Project Management
2.2.5. Account Team, Engineering, Installation, and Customer Service
2.2. Individual Roles and Responsibilities
2.3. Receive Requests
2.4. Log Requests
2.5. Initial Processing
2.6. Routing Change Orders
2.7. Processing Intervals
3. Process Flowcharts
3.1. Details of Change Order Control Flowchart
4. Quality Records and Reporting
4.1. Update Records
Distribute Change Feedback
Change Control Reporting
5. Training Requirements
6. COCP Administrator and Local Change Director Contacts
7. Acronyms
8. Forms
Form A Lucent Change Order Request Form
Form B Customer Change Order Request Form
Form C Rapid Response Form
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Edited by T. A. Norman, D. L. Marsh 05/05/98
Lucent Technologies Proprietary
Use Pursuant To Company Instructions
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<PAGE> 49
GLOBAL COMMERCIAL MARKETS (GCM) PROCESS DESCRIPTION
CHANGE ORDER CONTROL PROCESS
1. PURPOSE - SCOPE
A documented and well-implemented Change Order Control Process (COCP) is
necessary to control the dynamics of all project/order phases and assure mutual
satisfaction for the Customer and Lucent Technologies. The COCP ensures that
the integrity of the planned and approved Scopes of Work (SOW), schedules, and
quotes are preserved throughout the life of the project or order. The goal of
the COCP is to provide an efficient, comprehensive, and simple process that
serves as a single set of methods for requesting a change, implementing a
change, and notifying all parties of the result of the requested change. The
scope of this process , as documented, is applicable to Project Managed jobs
only.
A change involves additional and/or altered material and or services. To allow
for full revenue realization, it is imperative that all changes go through the
COCP. The COCP will insure that all Customer and Lucent generated changes will
be analyzed, and if necessary, quoted. Any quote that results in changes to the
cost and/or schedule must be approved by the customer. To ease receivable
collection, reduce rework, and provide a paper trail of customer approved
changes and recognized expenses, a new and/or revised purchase order must be
generated by the customer for all changes after the 1st spec. has been
transmitted from engineering to the factory . No additional material and/or
services, billable to the customer, will be processed and/or rendered until the
new and/or revised customer purchase order has been received.
Changes may include:
o Customer or Lucent originated change request that deals with changes to a
scope of work, completion schedule, or the quote value.
o Change that requires rescheduling of a key milestone, possibly resulting in
a change to the associated quote.
Examples:
o Add and/or delete work and its associated quote and schedule
o Reschedule a key milestone and its associated budget to create a better
plan
o Change out one circuit pack for another of equal value
o Order additional material already included in initial quote
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Deborah L. Marsh (910) 279-3218
Edited by T. A. Norman, D. L. Marsh 05/05/98
Lucent Technologies Proprietary
Use Pursuant To Company Instructions
- --------------------------------------------------------------------------------
<PAGE> 50
GLOBAL COMMERCIAL MARKETS (GCM) PROCESS DESCRIPTION
CHANGE ORDER CONTROL PROCESS
All changes originated by the customer, and changes that impact the customer (
schedule and/or cost) require customer approval. The change order request form
is the sole-authorized mechanism to initiate changes. Effective immediately,
the COCP will be the only authorized means for initiation and processing a
change order. A change order request can be submitted by anyone associated
with a project/order. To initiate a change, a change order request form must
be filled out completely and submitted to the Local Change Coordinator. No
form will be honored unless all required information is provided.
PLEASE NOTE: CUSTOMER REQUESTED CHANGES FOR ADDITIONAL MATERIAL OR SERVICES
RECEIVED AFTER THE 1ST SPECIFICATION TRANSMITS MUST BE HANDLED AS A NEW OR
REVISED PO.
1. PROCESS DESCRIPTION
The following sections describe the procedures, roles, and responsibilities
necessary to support implementation of the COCP.
2.1. LUCENT'S ROLES AND RESPONSIBILITIES FOR CONTROLLING CHANGES
Lucent Technologies Project Management Operations Organization will assume
ownership for receiving, distributing, and coordinating change order requests
and monitoring the change order control process (Functions A. -J. from below
list) until the new and/or revised Customer PO is received. The Customer
Service - Order Management (CSOM) Organization will process the order as they
do today (Functions K. -N. from the below list).
The responsibilities of this function include:
A. Verification that request form is properly completed by the
originator.
B. Confirm receipt of document from originator.
C. Assigning tracking control number.
D. Distribution of request form to appropriate parties for action
and approvals.
E. Record entry of change request in Change Log.
F. Tracking to insure that request turnaround time is met (5 working
days for a standard change request and 24 hours, or 1 day, for a
"service affecting" change request).
G. Make copies and store originals/printout of "change request" in
protected file cabinet.
H. Maintaining Change Order Log.
I. Notification to originator on disposition of change request
(i.e., accepted, completed, or withdrawn).
J. Track Customer Service-Asset Management (CSAM) to determine the
date the change was invoiced and the date revenue was collected.
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Deborah L. Marsh (910) 279-3218
Edited by T. A. Norman, D. L. Marsh 05/05/98
Lucent Technologies Proprietary
Use Pursuant To Company Instructions
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<PAGE> 51
GLOBAL COMMERCIAL MARKETS (GCM) PROCESS DESCRIPTION
CHANGE ORDER CONTROL PROCESS
K. Verification that a new and/or revised customer PO is received
before additional material/ services are rendered.
L. Input change order into the appropriate system for transmittal to
provider.
M. Track the process of the change request to inform all interested
parties of material/ services status after transmittal to
provider.
N. Notify CSAM of the change to verify that the customer is properly
invoiced.
2.2. INDIVIDUAL ROLES AND RESPONSIBILITIES
2.2.1. COCP ADMINISTRATOR
The Lucent COCP Administrator will be located in Greensboro, NC within the
Project Management Operations (PMO) Organization and will have ownership of the
Change Control Process and be responsible for the management of the process.
The responsibilities of this function include:
o Monitoring the flow of all Change Order Requests (From Function A-J as
listed above).
o Issuing root cause reports, as required, on the status of the Change Order
Control Process.
o Maintaining Change Order Logs.
o Coordinating the escalation process for unresolved change orders.
o Notifying the originator when the change order is complete.
o Forwarding change order requests to Customer Service Order Management
organization. Change requests received by 2:00 p.m. (Eastern) will be
forwarded to CSOM on the same day; change requests received after 2:00 p.m.
(Eastern) will be forwarded by 12:00 p.m. (Eastern) the following working
day.
o Monitoring the process for the receipt of all revenues resulting from the
change order process.
2.2.2. LOCAL CHANGE COORDINATOR
The Local Change Coordinator function will be resident in Greensboro, NC within
the Project Management Operations Organization. The Local Change Coordinator
(LCC) is responsible for:
o Notifying the originator that the Change Order Request was received.
o If form is received electronically, printing a hard copy.
o Reviewing all Change Order Requests to ensure the form is complete.
o Assigning a tracking number to all formal Change Order Requests (Form A)
from the COCP Change Order Log.
o Forwarding the Change Order Form (Form A) to the appropriate Technical
Consultant.
o Escalating change orders with unresolved issues to the COCP Administrator
for disposition. Every effort should be made to resolve issues at the
operating level.
TECHNICAL CONSULTANT
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Lucent Technologies Proprietary
Use Pursuant To Company Instructions
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<PAGE> 52
GLOBAL COMMERCIAL MARKETS (GCM) PROCESS DESCRIPTION
CHANGE ORDER CONTROL PROCESS
The technical consultant is responsible for analyzing the Request for Change to
determine if the change is valid. If the Technical Consultant determines that
the change request is valid, the TC is responsible for performing a detailed
analysis of the change order and completing section B of Form A. The
information includes but is not limited to:
o The cost impact, schedule impact, and material analysis of the change
request.
o Determining if the customer will be billed for the change.
o Coordinating the flow of information from the customer, customer
service, engineering, installation, project management, and the
account team to gather the necessary information to complete the
change.
o Notifying the LCC if issues involving the change order are unresolved.
Every effort should be made to resolve issues at the operating level.
o Completing section B of Form A and forwarding the completed form to
the LCC.
2.2.4. PROJECT MANAGEMENT
Project management will be responsible for obtaining and distributing a
schedule of authorizations to support the approval of change orders and
customer POs. The project manager is also responsible for :
o Interfacing with the customer. All customer changes go to the PM.
o Reviewing and VALIDATING all customer generated change requests, prior
to completing Form A.
o Completing FORM A, SECTION A. Submitting COMPLETED form to the LCC.
o Prioritizing Changes with the TC. The appropriate TC Functional
Manager should be consulted.
o Providing TC with schedule impact information.
o Coordinating COCP meetings, and ensuring that ALL FUNCTIONAL AREAS
are represented.
o Providing cost and/or schedule impact to the customer.
o Negotiating change order with the customer. Obtaining customer
approval.
o Forwarding a copy of approved change, with the new and/or revised PO
number, to LCC.
2.2.5. ACCOUNT TEAM, CUSTOMER SERVICE, ENGINEERING, AND INSTALLATION
The account team will be responsible for obtaining and distributing a schedule
of authorizations to support the approval on change orders and customer POs. It
is also the responsibility of the account team, customer service, engineering,
and installation to support the Technical Consultant, by providing accurate and
timely information as required, to support the change order process.
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Document Administrator: PAGE 6
Deborah L. Marsh (910) 279-3218
Edited by T. A. Norman, D. L. Marsh 05/05/98
Lucent Technologies Proprietary
Use Pursuant To Company Instructions
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<PAGE> 53
GLOBAL COMMERCIAL MARKETS (GCM) PROCESS DESCRIPTION
CHANGE ORDER CONTROL PROCESS
2.3. RECEIVE REQUESTS
Anyone associated with the project/order may request a change by submitting the
change order request form to the Local Change Coordinator. However, the origin
of the change will determine which form must be used (Form A or Form B).
Situation 1 - Customer modifies an order to add material and/or services which
generates a change order request. Customer generated changes will be done via
Form B. The customer will forward the change request to either the Project
Manager or the Account Team, who will fill out Form A. If the Account Team
fills out Form A, it is the responsibility of the Account Team to forward the
change to the PM. The PM is responsible for transmitting the change request to
the LCC. It is expected that, in most cases, the PM will be the recipient of
the change request. Situation 2 - Lucent Technologies internally identifies
that an order needs additional material and/or services which generates a
change order request. Internally generated change order requests will be done
via Form A. This will most commonly result from the customer providing
incorrect/incomplete or site information.
Requests may include (but are not limited to) expansion and/or revision to:
o Material
o Scope of Work
o Specifications
o Performance
o Schedules
o Delivery
o Terms & Conditions
o Drawings
o Equipment Arrangement/Location
All requests must be in writing on the form standardized for the COCP (Form A).
Copies of the Change Order Request Form must be submitted to the Local Change
Coordinator. The Local Change Coordinator will check the form to ensure all the
necessary information has been collected. Incomplete requests will be
redirected to the originator for clarification/correction and re-submission
and/or withdrawal. Completed forms will be logged and forwarded to the COCP
Administrator for tracking, reporting, and root cause analysis.
- --------------------------------------------------------------------------------
Document Administrator: PAGE 7
Deborah L. Marsh (910) 279-3218
Edited by T. A. Norman, D. L. Marsh 05/05/98
Lucent Technologies Proprietary
Use Pursuant To Company Instructions
- --------------------------------------------------------------------------------
<PAGE> 54
GLOBAL COMMERCIAL MARKETS (GCM) PROCESS DESCRIPTION
CHANGE ORDER CONTROL PROCESS
2.4. LOG REQUESTS
The Change Order Request Log includes a Tracking #, Customer PO #, Lucent Order
#, GS- #,Customer Key Code, Originator, Origination Date, Close Date,
Description of Change, Cost Impact, Schedule Impact, Project Management
District, New and/or Revised Customer PO #, New and/or Revised Lucent Order #,
and Customer Approval Date. Change Order Logs will be reviewed periodically by
the COCP Administrator to assure all requests are being handled in a timely
manner, as well as for planning/ reporting and initiating corrective action
based on change order causes.
2.5. INITIAL PROCESSING
The Local Change Coordinator shall have the following processing tasks
associated with the Change Orders received:
o Verify that the request form is properly completed.
o If form is received electronically, run a hard copy printout.
o Assign a tracking control number and enter it on the form.
o Record entry in Change Order Log.
o Distribute form to Technical Consultant and COCP Administrator.
o Confirm receipt of document from originator.
2.6 ROUTING CHANGE ORDER REQUEST
For each person that the Change Order Request form is sent to for action, a
specific request with the desired action and response date should be included
to allow for maximum efficiency. This communication is necessary for the
processing interval targets to be met.
2.7. PROCESSING INTERVALS
An interval of five business days has been established as the target to obtain
an official response (closure with customer - "yes" or "no") to a normal change
order request. The 5 day interval will begin from the date a valid (complete
with proper authorization) change order form is received by the Local Change
Coordinator .
If a change is service effecting (identified by installer) a target interval of
24 hours (1 day) will be adhered to.
- --------------------------------------------------------------------------------
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Deborah L. Marsh (910) 279-3218
Edited by T. A. Norman, D. L. Marsh 05/05/98
Lucent Technologies Proprietary
Use Pursuant To Company Instructions
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<PAGE> 55
GLOBAL COMMERCIAL MARKETS (GCM) PROCESS DESCRIPTION
CHANGE ORDER CONTROL PROCESS
GCM CHANGE ORDER CONTROL
FOR PROJECT MANAGED JOBS
VERSION 1.5 - 2/28/97
[FLOW CHART]
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Deborah L. Marsh (910) 279-3218
Edited by T. A. Norman, D. L. Marsh 05/05/98
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Use Pursuant To Company Instructions
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<PAGE> 56
GLOBAL COMMERCIAL MARKETS (GCM) PROCESS DESCRIPTION
CHANGE ORDER CONTROL PROCESS
GCM CHANGE ORDER CONTROL
ORDER MANAGEMENT
VERSION 1.0 5/05/97
[FLOW CHART]
- --------------------------------------------------------------------------------
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Deborah L. Marsh (910) 279-3218
Edited by T. A. Norman, D. L. Marsh 05/05/98
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Use Pursuant To Company Instructions
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<PAGE> 57
GLOBAL COMMERCIAL MARKETS (GCM) PROCESS DESCRIPTION
CHANGE ORDER CONTROL PROCESS
3.1 PROCESS FLOW
To insure Lucent Technologies Network Systems obtains revenue for sales and
services in an efficient manner, the customer must receive an accurate bill
capturing original and all additional approved material and/ or services.
Customer Service Order Management must have a purchase order (PO) number from
the customer before the Asset Management Team can render a bill for payment.
The following process is designed for Lucent Technologies Network Systems to
meet the objectives of serving the customer's needs on a given project and
receiving accurate compensation for product and services.
1. For Customer generated changes, the Project Manager is the primary
interface with the customer. All customer generated changes must go
through the PM. It is the PM's responsibility to validate the change,
and complete Form A, Section A
2. For Lucent generated change requests, the Request for Change (Form A,
Section A) must be completed by the originator. The originator may be
any Lucent employee associated with the project.
3. The form is sent (handed, faxed, emailed) to the Local Change
Coordinator for initial review. If the LCC determines the Request for
Change is incomplete, the LCC will notify the originator. If the
Request for Change is complete, the LCC will assign a tracking number,
and distribute the request to the appropriate TC.
4. The TC analyzes the change to determine if the request is a valid
change. If the change is not valid, the TC notifies the LCC (returns
Form A). If the TC determines that the request is a valid change, the
TC analyzes the change for cost and schedule impact. The TC may
require input from the AE, PM, engineering, customer service and/or
installation to assess impacts. The AE/PM contacts/negotiates with the
customer (if required) for authorization and signed approval of
upscope in quote.
5. The PM notifies the LCC Coordinator of the outcome.
a) If the Customer does not approve the change: the LCC Coordinator
notifies the originator (other then the PM) of the status. The AE/PM
is responsible for determining if the customer will proceed with the
original order. If the customer does not proceed with the original
order the AE/PM will place the order on hold, until they (AE/PM) have
resolved all outstanding issues. It is the AE/PM's responsibility to
notify all parties that the order is on hold.
b) If the Customer accepts the change: AE/PM forwards revised quote to
the Customer and requests a revised and/or new Purchase Order to cover
the change. Customer Service Order Management must receive the new
and/or revised Purchase Order, and an approved and properly authorized
Change Order from the COCP Administrator.
c) Once above information is received Customer Service Order Management
begins its normal process.
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Document Administrator: PAGE 11
Deborah L. Marsh (910) 279-3218
Edited by T. A. Norman, D. L. Marsh 05/05/98
Lucent Technologies Proprietary
Use Pursuant To Company Instructions
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<PAGE> 58
GLOBAL COMMERCIAL MARKETS (GCM) PROCESS DESCRIPTION
CHANGE ORDER CONTROL PROCESS
4.0 QUALITY RECORDS AND REPORTING
4.1.UPDATE RECORDS
4.2.DISTRIBUTE CHANGES/FEEDBACK ABOUT COCP
4.3.CHANGE CONTROL REPORTING
5. TRAINING REQUIREMENTS
Members of each team actively involved with a change order must have a working
knowledge of this document.
6. COCP ADMINISTRATION AND LOCAL CHANGE COORDINATOR CONTACTS
Once the forms are completed please fax them to the Local Change Coordinator at
(910)-279-5463. The Local Change Coordinator is Camille La Gatta.
For questions on using this process with Global Commercial Markets' Customers
call the COCP Administrator, Deborah L, Marsh, at (910) 279-3218.
7.0 ACRONYMS
<TABLE>
<S> <C>
AE Account Executive
AM Asset Manager
COCP Change Order Control Process
CTEO Customer Telephone Equipment Order
CSAM Customer Service - Asset Management
CSOM Customer Service - Order Management
EF&I Engineer, Furnish, & Install
FPQ Firm Price Quote
GCM Global Commercial Markets
LCC Local Change Coordinator
PO Purchase Order
PM Project Manager
PMOO Project Management Operation Organization
SOW Scope of Work
TC Technical Consultant
</TABLE>
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Deborah L. Marsh (910) 279-3218
Edited by T. A. Norman, D. L. Marsh 05/05/98
Lucent Technologies Proprietary
Use Pursuant To Company Instructions
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<PAGE> 59
GLOBAL COMMERCIAL MARKETS (GCM) PROCESS DESCRIPTION
CHANGE ORDER CONTROL PROCESS
FORM A
<TABLE>
<CAPTION>
<S> <C>
Tracking # VERSION 1.4
--------------------
Date Customer
-------------------- --------------------
Customer ECC Key Customer Code
-------------------- --------------------
===============================================================================================================
SECTION A
Date
--------------------
Responsible Technical Consultant Ph Fax
-------------------- -------------------- --------------------
Originator Ph Fax
------------------------------------ -------------------- --------------------
LUCENT ORDER # GS-9 - - Customer PO#
-------------------- ------------------ ------------
Reason for Change Request
------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
Description of Services to be Performed
-----------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
Is Project Program Managed Yes No
Is Change Service Affecting: Yes No
Is Change for (check all that apply): Engineering Installation Furnishing
Change Requested by: Customer Lucent
===============================================================================================================
SECTION B
===============================================================================================================
COST IMPACT SCHEDULE IMPACT CUSTOMER
NEW QUOTE # (INTERVAL IN DAYS) INFORMATION
================================= ==================================== ====================================
Engineering $ Engineering : :
================================= ==================================== ====================================
Material $ Material : SITE ADDRESS: :
================================= ==================================== ====================================
Installation $ Installation : :
================================= ==================================== ====================================
Trans $ :
================================= ==================================== ====================================
Rental $ :
================================= ==================================== ====================================
Misc Svc $ REQUESTED IMPLEMENT
================================= ==================================== ====================================
Haul.Hoist $ DATE :
================================= ==================================== ====================================
Warehouse $
================================= ==================================== ====================================
TOTAL PRICE NEW PO #
===============================================================================================================
Will Lucent incur additional costs : Yes No
--------------------------------
Will the Customer be billed additional costs : Yes No
--------------------------------
Change Order Distribution and Approval :
Tech. Consultant: Fax Date
------------- -------------- ----------- --------------------------------
Project Manager Fax Date
------------- -------------- ----------- --------------------------------
Account Executive Fax Date
------------- -------------- ----------- --------------------------------
CUSTOMER APP'L :
- --------------------------------------------------- ----------- -------------------------------------
- --------------------------------------------------- ----------- -------------------------------------
SIGNATURE (SIGN ABOVE) TITLE DATE
</TABLE>
ALL CHANGES SUBJECT TO TERMS AND CONDITIONS OF THE ORIGINAL CONTRACT
THE ABOVE PRICES ARE GOOD FOR____ DAYS AFTER ___/___/
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Document Administrator: PAGE 13
Deborah L. Marsh (910) 279-3218
Edited by T. A. Norman, D. L. Marsh 05/05/98
Lucent Technologies Proprietary
Use Pursuant To Company Instructions
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<PAGE> 60
GLOBAL COMMERCIAL MARKETS (GCM) PROCESS DESCRIPTION
CHANGE ORDER CONTROL PROCESS
FORM B
VERSION 1.0
Lucent GCM Tracking #
----------
CUSTOMER SECTION
================================================================================
Customer Name GS- 9 - -
--------------------------- ---------
Customer PO
--------------
Requester Date Of Request
--------------------------- ---------
Description Of Change:
-------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Reason for Change :
-------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
================================================================================
Requested Implementation Date
----------
ALL CHANGES SUBJECT TO TERMS AND CONDITIONS OF THE ORIGINAL CONTRACT
================================================================================
LUCENT TECHNOLOGIES SECTION
================================================================================
Lucent Technologies Order Number: Date:
- --------------------------------------------------------------------------------
CHANGE IMPACT
Scope:
--------------------------------------------------------------------
--------------------------------------------------------------------
--------------------------------------------------------------------
Schedule:
--------------------------------------------------------------------
--------------------------------------------------------------------
--------------------------------------------------------------------
ESTIMATE: Due Date for Firm Price Quote:
---------
Revised Quote #
--------------------------
Technical Consultant
--------------------
CUSTOMER APPROVAL SECTION
Name: Signature:
--------------------------- -----------------------------
ALL CHANGES SUBJECT TO TERMS AND CONDITIONS OF THE ORIGINAL CONTRACT
THE ABOVE PRICES ARE GOOD FOR DAYS AFTER / /
================================================================================
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Deborah L. Marsh (910) 279-3218
Edited by T. A. Norman, D. L. Marsh 05/05/98
Lucent Technologies Proprietary
Use Pursuant To Company Instructions
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<PAGE> 61
GLOBAL COMMERCIAL MARKETS (GCM) PROCESS DESCRIPTION
CHANGE ORDER CONTROL PROCESS
FORM C
RAPID RESPONSE FORM
Customer Name: Agreement No:
-------------------- --------------------------
Service Address: Billing Address:
------------------ -----------------------
- ---------------------------------- ---------------------------------------
(check one) Change Order [ ] Addition [ ]
- --------------------------------------------------------------------------------
Description of Work:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Estimated Cost Impact:
----------------------------------------------------------
- --------------------------------------------------------------------------------
Estimated Schedule Impact:
----------------------------------------------------------
- --------------------------------------------------------------------------------
Not to Exceed Price:
--------- --------------------------
(Customer's Pre Work Approval)
Work Commencement Date: Work Completion Date:
-------------- -------------------
- --------------------------------------------------------------------------------
Customer hereby acknowledges that this order is either a change to the original
order or is an addition to the work to which the parties have already agreed.
The terms and conditions of the Agreement identified above will cover the work
provided herein. Customer understands and acknowledges that the price of this
work is not covered under any purchase order or included in the Agreement
identified above. Customer agrees to have a purchase order issued within five
business days of the signing of this order. Customer further agrees that if a
properly executed purchase order is not received that this order will serve as
the authorization for work and for payment. Customer certifies that he/she has
the authority to authorize this work and the additional cost.
Lucent Technologies Inc.
By: By:
---------------------------- ------------------------------
Name: Name:
-------------------------- ----------------------------
Title: Title:
------------------------- ---------------------------
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Deborah L. Marsh (910) 279-3218
Edited by T. A. Norman, D. L. Marsh 05/05/98
Lucent Technologies Proprietary
Use Pursuant To Company Instructions
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<PAGE> 62
GLOBAL COMMERCIAL MARKETS (GCM) PROCESS DESCRIPTION
CHANGE ORDER CONTROL PROCESS
Date: Date:
------------------------ -------------------------------
VERSION 1.0
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Deborah L. Marsh (910) 279-3218
Edited by T. A. Norman, D. L. Marsh 05/05/98
Lucent Technologies Proprietary
Use Pursuant To Company Instructions
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<PAGE> 63
ADDENDUM NUMBER TWO TO THE
GENERAL AGREEMENT
BETWEEN ALLEGIANCE TELECOM, INC.
AND LUCENT TECHNOLOGIES INC.
This Addendum Two to the General Agreement (Contract Number LNM101697DASAT)
(hereinafter "ADDENDUM") is made effective as of the 15th day of April, 1998
("EFFECTIVE DATE") by and between Allegiance Telecom, Inc., a Delaware
corporation, with offices located at 1950 Stemmons Freeway, Suite 3026, Dallas,
Texas 75207 ("Customer"), and Lucent Technologies Inc., a Delaware corporation,
with offices located at 600 Mountain Avenue, Murray Hill, New Jersey 07974,
acting through its Network Systems group ("LUCENT").
WHEREAS, Customer and Lucent entered into a General Agreement (Contract
Number LNM101697DASAT) dated October 16, 1997 (hereinafter the "GENERAL
AGREEMENT"), setting forth the terms and conditions pursuant to which Lucent
agrees to supply and Customer agrees to procure Lucent Products, Licensed
Materials and Services; and
WHEREAS, Lucent and Customer desire to enter into this Addendum to set
forth certain terms and conditions regarding the procurement and/or license by
Customer of Lucent's CONNECTVU-ATP Software, Third Party Products, and related
Services.
NOW THEREFORE, in consideration of the mutual promises hereinafter set
forth and other good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties agree as follows:
1.1. SCOPE OF ADDENDUM
This Addendum shall govern any purchase order submitted by Customer to
Lucent during the Term for CONNECTVU-ATP, Third Party Equipment, and Services as
described in EXHIBIT B, PRICING OF CONNECTVU-ATP. Customer agrees that any such
purchase orders shall be subject in all respects to the terms set forth in the
General Agreement and this Addendum.
This Addendum is issued pursuant to and incorporates the non-conflicting
terms and conditions of the General Agreement. In the event of any conflict or
inconsistency between the terms of this Addendum and the terms of the General
Agreement, the terms of this Addendum shall prevail.
1.2. HEADINGS DEFINITIONS
All headings used in this Addendum are inserted for convenience only
and are not intended to affect the meaning or interpretation of this Addendum or
any clause. All capitalized terms not defined in this Addendum shall have the
meaning ascribed to them in the General Agreement. For the purposes of this
Addendum, the following definitions shall apply:
(a) "CONNECTVU-ATP" shall mean the Lucent Automated Translations and
Provisioning operations system Software that automates trunking support,
routing, charging, and complex services, as more fully described in the
Specifications set forth in EXHIBIT A, STATEMENT OF WORK, attached
hereto.
LUCENT TECHNOLOGIES INC. AND ALLEGIANCE TELECOM, INC. PROPRIETARY
<PAGE> 64
(b) "THIRD PARTY EQUIPMENT" and "THIRD PARTY SOFTWARE" shall mean the
vendor items listed in EXHIBIT B, PRICING OF CONNECTVU-ATP, attached
hereto which are available for purchase by Customer from Lucent in
accordance with SECTION 1.7, THIRD PARTY EQUIPMENT AND SOFTWARE, of
this Addendum.
1.3. TERM OF ADDENDUM TWO
This Addendum shall be effective for three (3) years after the
Effective Date. The term of this Addendum shall be referred to as the "TERM". If
the General Agreement terminates during the Term of this Addendum, this Addendum
shall co-terminously terminate.
1.4. SPECIFICATIONS
Unless otherwise mutually agreed in writing between the parties prior
to receipt of a purchase order by Lucent's Customer Service Department, all
CONNECTVU-ATP ordered under this Addendum shall be provided in accordance with
the specifications set forth in EXHIBIT A, STATEMENT OF WORK ("SPECIFICATIONS").
.
1.5. PRICING
The prices, fees and charges (hereinafter "PRICES") for any
CONNECTVU-ATP licensed to Customer under this Addendum and related Services
shall be as set forth in EXHIBIT B, PRICING OF CONNECTVU-ATP, attached hereto.
Lucent reserves the right to charge different right-to-use fees for any
CONNECTVU-ATP ordered by Customer which does not conform to the Specifications
as set forth in EXHIBIT A, STATEMENT OF WORK. After two (2) years following the
Effective Date, upon sixty (60) days prior written notice to Customer, Lucent
shall have the right to increase Prices set forth in EXHIBIT B, PRICING OF
CONNECTVU-ATP, once annually; provided, however, that such annual increase shall
in no event increase payments due under purchase orders already accepted by
Lucent or exceed three percent (3%) over then-current Prices.
1.6. CHANGE CONTROL PROCESS
Set forth in EXHIBIT C attached hereto.
1.7. THIRD PARTY EQUIPMENT AND SOFTWARE
During the Term, Customer shall have the right to purchase from Lucent
under this Addendum all or any portion of the Third Party Equipment and to
license all Third Party Software from Lucent. The prices for such Third Party
Equipment and the license fees for the Third Party Software shall be as quoted
by Lucent at time of order receipt.
1.8. SERVICES EXCLUDED FROM THE SCOPE OF THE ADDENDUM
Customer acknowledges that certain products and activities associated
with the installation and performance of CONNECTVU-ATP and the Third Party
Equipment and Third Party Software are not being provided by Lucent under this
Addendum for the Prices set forth in EXHIBIT B, PRICING CONNECTVU-ATP. These
products and activities may be provided to Customer by Lucent at Customer's
request for an additional price, to the extent Lucent provides such Products,
Licenses Materials or Services. Excluded items include, but are not limited, to
the following items:
LUCENT TECHNOLOGIES INC. AND ALLEGIANCE TELECOM, INC. PROPRIETARY
<PAGE> 65
a) Engineering, furnish and installation of Customer's packet network;
b) Detailed engineering (switches, CONNECTVU-ATP hardware);
c) Switch connectivity hardware (switch circuit packs, modems, shelves, etc.);
d) LAN equipment;
e) Systems equipment installation (switches);
f) Software maintenance
g) Hardware maintenance
h) Cabling, power, frame and aisle lighting, fireproofing, restorations,
cross-connections;
i) Hoisting and hauling;
j) Transportation charges;
k) Federal, state and local taxes;
l) Third party software maintenance (e.g., HP-UX, Informix, Solaris);
m) Switch Generic Synchronization (- support charge for CONNECTVU-ATP to
remain current with new switch generics) PRICE TERMS TO BE DISCUSSED;
n) Feature enhancements to the switch vendor's switching generic software
(e.g., Lucent 5ESS(R) generics 5E11, 5E12, or NTI DMS-100/200 generics
NA004, NA007) that require upgrades to CONNECTVU-ATP shall be billed
separately PRICE TERMS TO BE DISCUSSED;
o) Connection to the 5ESS switches and provision of detailed MOPs;
p) Installation of a LAN/WAN;
q) Integration and migration of Lucent Products and/or Software with Third
Party Equipment and/or Third Party Software;
r) Technical support of Lucent Products and/or Software with Third Party
Equipment and/or Third Party Software; and
s) Metasolv Interface.
LUCENT TECHNOLOGIES INC. AND ALLEGIANCE TELECOM, INC. PROPRIETARY
<PAGE> 66
1.9. ADDITIONAL FEES
The license provided by Lucent for CONNECTVU-ATP is based on Customer's
network size at the time of the Effective Date and such growth Lucent reasonably
estimates. In the event of an increase in the network size in any year,
including, but not limited to, increases resulting from acquisition, merger or
other causes (other than increases resulting from market growth or technological
change affecting all similarly situated carriers), Lucent reserves the right to
require an equitable revision in payments and fees due hereunder proportional to
such growth. In the event of such growth, Lucent shall provide an additional per
switch incremental discount in the Pricing set forth in EXHIBIT B, PRICING OF
CONNECTVU-ATP.
1.10. INITIAL TRAINING
Training for CONNECTVU-ATP shall be as set forth in EXHIBIT B, PRICING
OF CONNECTVU-ATP.
1.11. LICENSE FOR LICENSED MATERIALS
ARTICLE II, "Provisions Applicable to Licensed Materials," of the
General Agreement shall be applicable to the licensing of CONNECTVU-APT.
1.12 METASOLV INTERFACE PLAN WARRANTY
Lucent represents and warrants to Customer that Lucent has provided
Customer with all information, including Documentation, that will allow Customer
to develop a Metasolv Interface plan. If Customer determines that additional
information is needed for development of the Metasolv Interface plan, then
Lucent shall provide such information to Customer at no additional cost unless
such provision of information will involve a significant effort by Lucent, in
which case Lucent shall provide such information to Customer at Lucent's
then-prevailing rates. Customer, at its sole option, may retain Lucent or a
third party to assist in developing the Metasolv Interface. If Customer retains
Lucent, such Services shall be provided to Customer at an additional cost.
1.13. YEAR 2000 WARRANTY
1.13.1 GENERAL. Lucent represents and warrants that,
notwithstanding any other warranty provided to Customer pursuant to
this Addendum or the General Agreement, that Lucent Software will be
able accurately to (a) process any date-rollover event with no adverse
impact on the functionality of Customer's system, including without
limitation, the producing of error(s) or abnormal interruptions; (b)
process date-data calculations including, without limitation,
computations, comparisons, sequencing, sorts and extracts, and returns
and displays date-data in a consistent manner regardless of the dates
used in such date-data whether before, on, during or after January 1,
2000; (c) process any date-data computations that can be expected from
Customer's system if used for its intended purpose, regardless of the
date in time on which the processes are actually performed and
regardless of the date-data input, whether before, on, during, or after
January 1, 2000; (d) exchange date-data related information with other
hardware, firmware or Software with which it interacts, provided that
the interacting hardware, firmware or Software is itself capable of
exchanging accurate date-data; and (e) accept and respond to two-digit
year-date input in a manner that resolves any ambiguities as to the
century in a defined, predetermined and appropriate manner. No
date-data shall cause the Software to perform an
LUCENT TECHNOLOGIES INC. AND ALLEGIANCE TELECOM, INC. PROPRIETARY
<PAGE> 67
abnormally ending routine or function within the processes or generate
incorrect values or invalid results. For purposes of the foregoing, a
date-rollover event is defined as any transition between one calendar
year and the following year including, without limitation, any time,
date and day-of-the-week progressions and any regularly scheduled leap
events. Date-data is defined as any data, formula, algorithm, process,
input, or output, which includes, calculates or represents a date, day
or time, a reference to a date, day or time, or a representation of a
date, day or time. All of the foregoing functionality shall be known as
"Year 2000 Capability". In the event Customer has or purchases more
than one version of Lucent Software, such versions of Software, if they
are intended by Lucent to interoperate, will be compatible and
interoperate in such manner as to process between them, as applicable,
date related data correctly as warranted herein. All of the foregoing
functionality shall be known as "Year 2000 Interoperability". The
foregoing sets forth an additional warranted specification for Software
developed by Seller that Seller has identified as having Year 2000
Capability. The failure of such Lucent Software to meet such
specification during the Year 2000 Warranty Period the representations
and warranties in this SECTION 1.13, YEAR 2000 WARRANTY, shall, to the
extent the Software remains then subject to warranty protection,
entitle Customer to the remedies set out in this SECTION 1.13.4,
SPECIAL REMEDIES.
1.13.2 THIRD PARTY SOFTWARE. Lucent covenants that it will
timely test Lucent software with (commencing no later than June 1,
1998) any and all Third Party Software embedded in Lucent Software and
all Third Party Software provided to Customer through Lucent to
determine whether such Software is compatible with the warranties set
forth above. Nothing in the foregoing shall be deemed to make Lucent
responsible for the Year 2000 Capability or Year 2000 Interoperability
of any third party software interoperating or intended to interoperate
with Software developed by Lucent. Customer and or the manufacturer or
other supplier of such third party software shall be responsible for
such compliance and assuring the ability of such software to
successfully operate while interoperating with Software developed by
Lucent.
1.13.3 SPECIAL REMEDIES UPON BREACH OF MILLENNIUM WARRANTY. In
the event of any breach of the warranties and covenants contained in
this Section, in addition to any other rights and remedies that may be
available to Customer under this Addendum, Lucent shall be responsible
for any costs of repairing and correcting the affected Software
including the cost of any software, equipment and associated repair and
correction services.
1.14 ENTIRE AGREEMENT
Except as specifically modified, amended or supplemented herein, all
terms and conditions of the General Agreement shall remain in full force and
effect. The terms and conditions contained in this Addendum and those
non-conflicting terms and conditions of the General Agreement supersede all
prior oral and written understandings between the parties and shall constitute
the entire agreement between the parties with respect to the subject matter
herein. This Addendum shall not be modified or amended except by a writing
signed by an authorized representative of both parties.
LUCENT TECHNOLOGIES INC. AND ALLEGIANCE TELECOM, INC. PROPRIETARY
<PAGE> 68
IN WITNESS WHEREOF, the parties have caused this Addendum to be executed
by their duly authorized representatives on the date(s) indicated.
ALLEGIANCE TELECOM INC. LUCENT TECHNOLOGIES INC.
By: /s/ DANA CROWNE By:
---------------------------------- ---------------------------------
Typed Name: DANA CROWNE Typed Name:
-------------------------- -------------------------
Title: Senior Vice President & Chief Title:
Engineer ------------------------------
-------------------------------
Date: Date:
-------------------------------- -------------------------------
LUCENT TECHNOLOGIES INC. AND ALLEGIANCE TELECOM, INC. PROPRIETARY
<PAGE> 69
EXHIBIT A
STATEMENT OF WORK
FOR AN
OPERATIONS SUPPORT SOLUTION
BETWEEN
ALLEGIANCE TELECOM, INC.
AND
LUCENT TECHNOLOGIES, INC.
LUCENT TECHNOLOGIES INC. AND ALLEGIANCE TELECOM, INC. PROPRIETARY
<PAGE> 70
<TABLE>
<CAPTION>
TABLE OF CONTENTS
SECTION PAGE
- ------- ----
<S> <C>
1. SCOPE.........................................................................................................10
2. PREREQUISITE MATERIALS FOR OPERATIONS SUPPORT SOLUTION........................................................10
3. DEFINITIONS...................................................................................................10
4. SOW CHANGE CONTROL............................................................................................11
5. DESCRIPTION...................................................................................................11
6. FUNCTIONAL ARCHITECTURE.......................................................................................11
6.1 OPTIONAL FEATURES AND AVAILABILITY........................................................................13
6.2 CONNECTIVITY REQUIREMENTS.................................................................................13
7. HARDWARE ARCHITECTURE.........................................................................................13
7.1 ATP CENTRAL SERVER..........................................................................................
7.2 ATP FRONT ENDS............................................................................................14
7.3 OFF-SWITCH WORKSTATION (OSW)..............................................................................14
7.4 PERIPHERALS...............................................................................................15
7.4.1 ATP PRINTERS..........................................................................................15
7.4.2 USER TERMINAL AND SUPPORTING NETWORK..................................................................15
7.5 DATA COMMUNICATIONS NETWORK...............................................................................16
8. SOFTWARE ARCHITECTURE.........................................................................................16
8.1 OPERATING SYSTEMS.........................................................................................16
8.2 DATABASE..................................................................................................16
8.3 THIRD-PARTY SOFTWARE AND LICENSES.........................................................................16
9. SYSTEM PERFORMANCE............................................................................................17
9.1 CAPACITIES, LIMITS AND RESTRICTIONS.......................................................................17
10. PROJECT MANAGEMENT...........................................................................................18
10.1 PROJECT MANAGEMENT ACTIVITIES AND REQUIREMENTS...........................................................18
10.2 METHODOLOGY AND TOOLS....................................................................................19
10.3 INITIAL SWITCH CONNECTIVITY PLAN.........................................................................19
10.4 DOCUMENTATION............................................................................................19
10.5 CONNECTVU-ATP TRAINING...................................................................................21
10.5.1 CONNECTVU-ATP END USER (OS0505)......................................................................21
10.5.2 CONNECTVU-ATP SYSTEM ADMINISTRATION (OS0504).........................................................22
10.5.3 CONNECTVU-ATP OPERATIONS ADMINISTRATION (OS0506).....................................................23
11. DEPLOYMENT...................................................................................................24
11.1 DELIVERY.................................................................................................24
11.2 INSTALLATION.............................................................................................24
11.2.1 CENTRAL/SERVERS AND WORKSTATIONS/PC(S)...............................................................24
11.2.2 SWITCH EQUIPMENT.....................................................................................25
</TABLE>
LUCENT TECHNOLOGIES INC. AND ALLEGIANCE TELECOM, INC. PROPRIETARY
<PAGE> 71
<TABLE>
<S> <C>
11.2.3 COMMUNICATIONS SOFTWARE ON HOST......................................................................25
11.2.4 COMMUNICATIONS SOFTWARE ON FRONT-END/SERVERS.........................................................26
11.3 ACCEPTANCE TEST PLAN.....................................................................................26
11.4 DEPLOYMENT MILESTONES....................................................................................26
</TABLE>
LUCENT TECHNOLOGIES INC. AND ALLEGIANCE TELECOM, INC. PROPRIETARY
<PAGE> 72
STATEMENT OF WORK FOR AN
OPERATIONS SUPPORT SOLUTION
BETWEEN ALLEGIANCE TELECOM, INC.
AND LUCENT TECHNOLOGIES, INC.
SCOPE
This Statement of Work ("SOW") is attached as EXHIBIT A to and made a part of
that certain Addendum Two ("Addendum") to the General Agreement (Contract Number
LNM101697DASAT) ("GENERAL AGREEMENT") dated October 16, 1997 between Lucent
Technologies Inc. ("LUCENT") and ALLEGIANCE TELECOM, INC. ("ALLEGIANCE"). This
SOW shall set forth certain information and roles and responsibilities of the
parties with respect to certain Communications Software Products to be ordered
by ALLEGIANCE and furnished by Lucent under the Addendum including, without
limitation, the features and technical specifications for the Software packages
described herein (which shall be the Specifications for such Software for
purposes of the applicable Lucent warranty), the list and description of
material which comprises the Communications Software Products, a project
schedule governing Lucent's delivery of the Communications Software Products,
and a description of the applicable acceptance tests and acceptance criteria.
PREREQUISITE MATERIALS FOR OPERATIONS SUPPORT SOLUTION
In consideration of Allegiance's intent to purchase DEP (Datakit Elimination
Package), Allegiance understands that Lucent is providing a loaner Datakit to
support five (5) switches and that this functionality is required as part of the
Allegiance network. Any growth beyond five (5) switches will be at an extra cost
to Allegiance. Ninety (90) days after declared GA of DEP, Allegiance will be
required to obtain a DEP.
Ninety (90) days after declared GA of DEP, Lucent will suspend support of
Datakit and require an order for DEP. Lucent/Allegiance will then negotiate a
mutually agreed upon date for the removal of the Datakit and cutover to DEP on a
date not to exceed 45 days from date of order.
DEFINITIONS
All capitalized terms not expressly defined in this SOW shall have the meaning
ascribed to them in the Addendum.
a) "CHANGE CONTROL" means the process for updating this SOW as described in
the Addendum, SECTION 1.6, CHANGE CONTROL PROCESS.
b) "CONNECTVU-ATP" (AUTOMATED TRANSLATION AND PROVISIONING) is a
Communications Software Product that automates switch provisioning (memory
administration) for infrastructure (Recent Change/Verify which support
trunking, routing, charging, and complex services set-up) and line-side
(Recent Change/Verify which support service activation for POTS, Centrex
and ISDN).
c) "ECHO BACK LINKS" means the mechanism for providing RC/V success, RC fails,
and RC batch messages from the 5ESS or DMS switch to CONNECTVU-ATP.
LUCENT TECHNOLOGIES INC. AND ALLEGIANCE TELECOM, INC. PROPRIETARY
<PAGE> 73
d) "MILESTONE" means an event that will be tracked to measure the status of
the activities defined in this SOW.
e) "RECENT CHANGES/VERIFY" means the mechanism for entering and retrieving
switch configuration data into/from the switch.
SOW CHANGE CONTROL
On the effective date of the Addendum, the content of the SOW will be baselined
such that future changes will be requested, approved and implemented through the
Change Control process described in the Addendum, SECTION 1.6, CHANGE CONTROL
PROCESS, including mutual written agreement between the parties prior to
changing the SOW. Upon request and prior written agreement between the parties
regarding the terms, Lucent will work with third party vendors to integrate
changes to the Communications Software Products offered herein. Lucent makes no
representation or warranty that such change or the Communications Software
Products will work with any third party vendor items unless the same is
expressly set forth in this SOW.
If Lucent accepts a change to this SOW which requires Lucent Products to
inter-work with systems supplied by a third party, prior to changing this SOW
and implementing such change, ALLEGIANCE will obtain the written approval from
the affected third party and satisfy any requirements of such third-party.
DESCRIPTION
In consideration of the payment by ALLEGIANCE of the license and other fees
described in the Contract, Lucent shall provide to ALLEGIANCE, in accordance
with SECTION 11.4, "Deployment Milestones," of this SOW: CONNECTVU-ATP ("ATP").
In addition, Lucent will provide project management services necessary to
install the ATP as described in SECTION 11.2, "Installation," of this SOW.
Milestones, the parties' responsibilities for each milestone, and the milestone
dependencies are described in SECTION 11.4, "Deployment Milestones" of this SOW.
Lucent will also conduct the acceptance test plan as described in SECTION 11.3,
hereof.
FUNCTIONAL ARCHITECTURE
In consideration of the payment of the license fees set forth in the Contract,
Lucent will deliver ATP Release 4.0 in accordance with the milestones in SECTION
11.4, "Deployment Milestones" of this SOW.
The features of the CONNECTVU-ATP product (Release 4.0) listed in the following
table are included in the pricing in the Contract unless explicitly noted
otherwise.
<TABLE>
<CAPTION>
<S> <C> <C>
- --------------- -------------------------------------------------- --------------------------------------------------
REF. NO. FUNCTION COMMENTS
- --------------- -------------------------------------------------- --------------------------------------------------
ATP1.1 Support for 5ESS generic 5E12 and DMS100 generic ATP Release 4.0
NA007.
- --------------- -------------------------------------------------- --------------------------------------------------
ATP1.2 Support of mechanized switch provisioning for A complete list of views/tables will be
Infrastructure Recent Change/Verify. delivered under a separate cover.
- --------------- -------------------------------------------------- --------------------------------------------------
ATP1.3 Support of mechanized switch provisioning for A complete list of views/tables will be
- --------------- -------------------------------------------------- --------------------------------------------------
</TABLE>
LUCENT TECHNOLOGIES INC. AND ALLEGIANCE TELECOM, INC. PROPRIETARY
<PAGE> 74
<TABLE>
<CAPTION>
<S> <C> <C>
- --------------- -------------------------------------------------- --------------------------------------------------
REF. NO. FUNCTION COMMENTS
- --------------- -------------------------------------------------- --------------------------------------------------
Line-Side Recent Change/Verify. delivered under a separate cover.
- --------------- -------------------------------------------------- --------------------------------------------------
ATP1.4 Switch coupler to create and maintain an mirror ALLEGIANCE must purchase appropriate
time updates to the ATP shadow database whenever Echo-Back image of the switch database by
changes are made to the switch database. providing real feature support from NORTEL.
- --------------- -------------------------------------------------- --------------------------------------------------
ATP1.5 Real time provisioning of switch Recent
Change/Verify.
- --------------- -------------------------------------------------- --------------------------------------------------
ATP1.6 Power tools for rapid creation of multiple
Recent Change/Verify across switch network.
- --------------- -------------------------------------------------- --------------------------------------------------
ATP1.7 Textual and Graphical User interface. Executing ATP GUI in a PC environment requires
sufficient bandwidth and PC capacity to achieve
acceptable performance levels. Lucent will
provide an initial consultation to ALLEGIANCE if
required.
- --------------- -------------------------------------------------- --------------------------------------------------
ATP1.8 Report generation.
- --------------- -------------------------------------------------- --------------------------------------------------
ATP1.9 User Defined templates for switch
standardization.
- --------------- -------------------------------------------------- --------------------------------------------------
ATP1.10 Intelligent and Vendor defaults allow data entry shortcuts.
- --------------- -------------------------------------------------- --------------------------------------------------
ATP1.11 Security features including: user and password
authentication, login groups with various
degrees of access
- --------------- -------------------------------------------------- --------------------------------------------------
ATP1.12 Support Year 2000 Requires appropriate third-party software year
2000 compliance.
- --------------- -------------------------------------------------- --------------------------------------------------
ATP1.13 Separate audit channel to maintain integrity of Available for Lucent's TNM and BELLCORE's NMA
shadow database. systems. Integration into any other
surveillance system is not included in the RTU
fee for this offer.
- --------------- -------------------------------------------------- --------------------------------------------------
ATP1.14 Support for LNP 5ESS: 9.36 view, DMS - four (4) tables:
HOMELRN, FNPA7DIG, QORCAUSE, and PORTNUMS.
- --------------- -------------------------------------------------- --------------------------------------------------
ATP1.15 Support for DNU-S 5ESS - five (5) views: 19.13, 19.14, 20.12,
20.24, 20.25
- --------------- -------------------------------------------------- --------------------------------------------------
ATP1.16 Support the creation of a virtual standard CONNECTVU-ATP provides a rich repertoire of
switch for reference. power tools that facilitate the construction of
a virtual switch, and that can be used to copy
translations from this switch to other switches.
For example the XCOPY feature can be used to
query a set of translations from the virtual
switch and to create a translations order of
insert RCs in a new switch, based on the
queried translations from the virtual switch.
- --------------- -------------------------------------------------- --------------------------------------------------
</TABLE>
LUCENT TECHNOLOGIES INC. AND ALLEGIANCE TELECOM, INC. PROPRIETARY
<PAGE> 75
OPTIONAL FEATURES AND AVAILABILITY
The following additional features will be made optionally available to
ALLEGIANCE to purchase, at their General Availability (GA) date:
<TABLE>
<CAPTION>
<S> <C>
- -------------------------------------- ---------------------------------------
FEATURE AVAILABILITY
- -------------------------------------- ---------------------------------------
Task Tool-Kit which includes: Targeted date - December 1998
o Dynamic Task Builder
o Task Execution Engine
o Task Execution via Java GUI
- -------------------------------------- ---------------------------------------
DataKit Elimination Targeted date - December 1998
- -------------------------------------- ---------------------------------------
</TABLE>
CONNECTIVITY REQUIREMENTS
ALLEGIANCE is required to procure the products and materials required for
DataKit(R) and switching connectivity between the ATP Central and each of the
switches.
ALLEGIANCE at its sole cost and expense is responsible for providing 10Kbps LAN
connectivity, per instance of ATP Central to Front-End Processor connectivity,
as well as between the Front-End Processor and the PCs, in accordance with the
CONNECTVU-ATP Planning Guide.
HARDWARE ARCHITECTURE
This architecture is based on an initial sizing estimates from ALLEGIANCE. It
addresses the production environment for Lucent's systems taking advantage of
"off the shelf" configuration. The standard hardware configuration for
ALLEGIANCE is three 1.6 M bay arrangement. Changes in hardware configuration may
result in additional service changes to ALLEGIANCE for certification of
non-standard hardware configuration. In addition, Lucent requires ALLEGIANCE to
sign a waiver limiting Lucent's liability due to changes made to the standard
configuration by ALLEGIANCE.
Due to specialized high availability requirements for ATP, the ATP Server is
being deployed in its duplex processor configuration.
ATP utilizes a flexible distributed architecture. The ATP systems consists of
two major processing systems:
ATP Central
ATP Front Ends
The Central processor that manages the communication and Central database
functions consists of a high availability (primary/backup processors)
Hewlett-Packard configuration with high bandwidth DAT backup. The ATP Front-End
processor consists of a SUN server for work flow management and PC-based
X-terminals interconnected via a TCP/IP LAN. The architecture is scaleable and
allows for very flexible work center access.
LUCENT TECHNOLOGIES INC. AND ALLEGIANCE TELECOM, INC. PROPRIETARY
<PAGE> 76
The Central is provided in a duplex mode for reliability. One processor is the
active system and the other processor is a back-up system. The back-up
processor's primary role is to provide redundancy in the event the active
processor is not available.
The operations center hardware for the ATP Central is based on a Hewlett Packard
duplex configuration. ATP offers a standard K420 configuration the with duplex
processor consists of the following components.
<TABLE>
<CAPTION>
<S> <C>
- --------------------- -------------------------------------------------------------------------------
ATP CENTRAL CONFIGURATION
- --------------------- -------------------------------------------------------------------------------
PROCESSOR Duplex HP K420 Servers with 4 120 Mhz processors
each, equipped with CD ROM and DAT Tape for SW load
- --------------------- -------------------------------------------------------------------------------
MEMORY 1.5 Gb memory
- --------------------- -------------------------------------------------------------------------------
NETWORK CARDS 10BaseT/100BaseT Ethernet card
DataKit Z7126A, Z7127A and associated driver software
- --------------------- -------------------------------------------------------------------------------
DISKS (APPLICATION 2 External Disk cabinets
DATABASE) 4GB Boot Disk (8G total)
64 Mirrored Disks (128G total)
- --------------------- -------------------------------------------------------------------------------
PERIPHERALS 4 FWD SCSI-2 Cards each 3 SE SCSI-2 Cards each
9-track tape for switch load 6 external 12G DATs, DB
backup
- --------------------- -------------------------------------------------------------------------------
</TABLE>
ATP FRONT ENDS
The ATP Front End provides an interface between the Central and the
work-centers. A duplexed Front End configuration is offered for reliability.
Both units are active and share the processing tasks. In the event of a failure
of one of the Front End units, all of the tasks can be directed to a single
unit. The ATP user display is a motif-based X-window graphical user interface.
This display are remoted via X11 protocol onto an X-server running on a local
user PC desktop.
The ATP Front End hardware consists of a SUN UltraSPARCII pair, each equipped
with the following:
<TABLE>
<CAPTION>
<S> <C>
- --------------------- --------------------------------------------------------------------------
ATP FRONT-END CONFIGURATION
- --------------------- --------------------------------------------------------------------------
PROCESSOR SUN UltraSPARCII Model 1300 with one 300Mhz processor
- --------------------- --------------------------------------------------------------------------
MEMORY 128 Mb Expansion (2X32 Mb DIMMS)
- --------------------- --------------------------------------------------------------------------
NETWORK CARDS 10Base T/100BaseT Ethernet card
- --------------------- --------------------------------------------------------------------------
DISKS 2 @ Internal 4.2 GB 7200 RPM SCSI disk drive
- --------------------- --------------------------------------------------------------------------
INTERNAL Turbo Graphics Card
- --------------------- --------------------------------------------------------------------------
PERIPHERALS 12-24GB 4mm DDs-3 Tape Unipack with 68-to-68 pin SCSI cable
20 " Monitor
- --------------------- --------------------------------------------------------------------------
</TABLE>
OFF-SWITCH WORKSTATION (OSW)
The Off-Switch Workstation (OSW) is used to initialize the CONNECTVU-ATP 5E
database.
The OSW hardware consists of a single SUN UltraSPARCII configuration as
described in the following table:
LUCENT TECHNOLOGIES INC. AND ALLEGIANCE TELECOM, INC. PROPRIETARY
<PAGE> 77
<TABLE>
<CAPTION>
<S> <C>
- --------------------- --------------------------------------------------------------------------
ATP OSW CONFIGURATION
- --------------------- --------------------------------------------------------------------------
PROCESSOR SUN UltraSPARCII Model 1300 with one 300Mhz processor
- --------------------- --------------------------------------------------------------------------
MEMORY 128 Mb Expansion (2X32 Mb DIMMS)
- --------------------- --------------------------------------------------------------------------
NETWORK CARDS 10Base T/100BaseT Ethernet card
- --------------------- --------------------------------------------------------------------------
DISKS 2 @ Internal 4.2 GB 7200 RPM SCSI disk drive
- --------------------- --------------------------------------------------------------------------
INTERNAL Turbo Graphics Card
- --------------------- --------------------------------------------------------------------------
PERIPHERALS 12-24GB 4mm DDs-3 Tape Unipack with 68-to-68 pin SCSI cable
20 " Monitor
- --------------------- --------------------------------------------------------------------------
</TABLE>
PERIPHERALS
ATP PRINTERS
o (2) EPSON LQ-870 Dot-matrix printer or equivalent connected to the ATP
console terminal for logging of installation and error messages
o (1) HP LaserJet 6M PLUS series printers which automatically switches
between postscript and PCL. The ATP Front Ends use remote postscript
printing for printing screens, while the ATP Central uses remote ASCII
or PCL printing for reports. The HP LaserJet 6M Plus Series printer
connects via a Microplex Model M202 PLUS box to ALLEGIANCE's LAN.
USER TERMINAL AND SUPPORTING NETWORK
The ATP application will be accessible from appropriately configured desktop
PCs.
PC DESKTOP CONFIGURATION
It is expected that the following PC configuration should suffice for
Lucent application co-display:
<TABLE>
<S> <C>
CPU type: 166 MHz Pentium or greater
Operating System: Windows NT 4.0 Workstation or Windows95
System Memory: 32 Meg or greater
Video Memory: 2 Meg or greater
Monitor Resolution: 1024x768 or greater
Monitor Size: 17" or greater
LAN Hardware: 10Mbps or 100Mbps TCP/IP
PC Software Netscape Communicator 4.0, or 4.04 with JDK 1.1 patches
Hummingbird exceed 6.0
</TABLE>
The Hummingbird exceed is required for access to ATP X-based GUI. The use of the
PC for Lucent's applications coupled with simultaneous usage needs of
ALLEGIANCE's existing systems accessible from the common PC, may dictate higher
requirements for system CPU, memory and network. If the Task Tool-Kit feature is
purchased, changes may be required to the PC configuration.
LUCENT TECHNOLOGIES INC. AND ALLEGIANCE TELECOM, INC. PROPRIETARY
<PAGE> 78
DATA COMMUNICATIONS NETWORK
The Central/Server utilizes CMP-HS boards to connect to the Datakit network. The
same Datakit host network, co-located with the Central/Server is utilized to
connect to the telemetry network for ATP access to ALLEGIANCE switches via X.25
protocol. The Lucent Front-End/Server is interconnected via 10BaseT Ethernet
network to the Central/Server. Each ATP Front-End/Server is required to be on
the same LAN sub-net segment. The data network to interconnect servers and
clients should be designed to minimize X11 traffic over the WAN interconnecting
ALLEGIANCE's remote sites. Lucent recommends placing the ATP Front-End/Server
and corresponding client PCs on a separate LAN segment, to eliminate broadcast
of this X11 traffic.
SOFTWARE ARCHITECTURE
OPERATING SYSTEMS
- ----------------------------------------------------------------------
OPERATING SYSTEM SOFTWARE - ATP CENTRAL
- ----------------------------------------------------------------------
HP UX 10.20
- ----------------------------------------------------------------------
Lucent One OS/BaseWorX 6.2 Platform
- ----------------------------------------------------------------------
HP MirrorDisk/UX
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
OPERATING SYSTEM SOFTWARE - ATP FRONT END
- ----------------------------------------------------------------------
Sun Solaris 2.5.1 11/97
- ----------------------------------------------------------------------
DATABASE
- ----------------------------------------------------------------------
DATABASE SOFTWARE - ATP CENTRAL
- ----------------------------------------------------------------------
Informix Online DS-Dev /User License 7.23UC4
- ----------------------------------------------------------------------
Informix SQL Runtime 6.05.UD2
- ----------------------------------------------------------------------
Informix 4GL Runtime 6.05.UC1
- ----------------------------------------------------------------------
THIRD-PARTY SOFTWARE AND LICENSES
The ATP application third party software is packaged with the ATP application.
1. ALLEGIANCE may choose to purchase licenses for this third-party software
directly from the vendor or through Lucent. If purchased directly through
the vendor, ALLEGIANCE will be responsible for supplying appropriate keys
to Lucent during the ATP installation. ALLEGIANCE is also responsible for
obtaining licenses for upgrades to future versions of the operating systems
should subsequent ATP releases require OS upgrades. Per the Lucent
Communications Software, Third-Party Hardware and Software Distribution
Policy published 2/20/98, if ALLEGIANCE purchases or leases this software
(e.g., Informix, Solaris) directly from the suppliers, Lucent needs from
ALLEGIANCE, a letter on each of the supplier(s) letterhead, stating:
o number of user licenses purchased
o confirming that software maintenance has been purchased
o authorizing Lucent to deliver patches, fixes, etc. on behalf of the
supplier.
LUCENT TECHNOLOGIES INC. AND ALLEGIANCE TELECOM, INC. PROPRIETARY
<PAGE> 79
<TABLE>
<CAPTION>
<S> <C> <C>
- ------------------------------------------------------------------- ---------------------------------- --------------------
SOFTWARE QUANTITY SUPPLIED BY
- ------------------------------------------------------------------- ---------------------------------- --------------------
HP UX 10.20 - Primary (Unlimited) one (1) copy ALLEGIANCE
- ------------------------------------------------------------------- ---------------------------------- --------------------
HP UX 10.20 - Backup (2 Users) one (1) copy ALLEGIANCE
- ------------------------------------------------------------------- ---------------------------------- --------------------
Informix Online DS-Dev /User License 7.23UC4 (64 users) one (1) copy (license) ALLEGIANCE
- ------------------------------------------------------------------- ---------------------------------- --------------------
Informix Online DS-Dev /User License 7.23UC4 Assurance one (1) copy (license) ALLEGIANCE
- ------------------------------------------------------------------- ---------------------------------- --------------------
HP MirrorDisk/UX one (1) copy ALLEGIANCE
- ------------------------------------------------------------------- ---------------------------------- --------------------
Informix SQL Runtime 6.05.UD2 one (1) copy ALLEGIANCE
- ------------------------------------------------------------------- ---------------------------------- --------------------
Informix SQL Runtime 6.05.UD2 Assurance one (1) copy ALLEGIANCE
- ------------------------------------------------------------------- ---------------------------------- --------------------
Informix 4GL Runtime 6.05.UC1 one (1) copy ALLEGIANCE
- ------------------------------------------------------------------- ---------------------------------- --------------------
Informix 4GL Runtime 6.05.UC1 Assurance one (1) copy ALLEGIANCE
- ------------------------------------------------------------------- ---------------------------------- --------------------
Lucent OneOS/BaseWorX 6.2 Platform one (1) copy Lucent
- ------------------------------------------------------------------- ---------------------------------- --------------------
Sun Solaris 2.5.1 11/97 three (3) copies ALLEGIANCE
- ------------------------------------------------------------------- ---------------------------------- --------------------
</TABLE>
SYSTEM PERFORMANCE
CAPACITIES, LIMITS AND RESTRICTIONS
The factors listed below determine the CONNECTVU-ATP Central processor
application capacity:
o Number of Switches
o Switch Technology mix
o Number of Lines
o Number of Trunks
o RC change activity (number of changes per line/trunk per year)
o Number of Rate Centers supported per switch Number of Views/Tables shadowed
The ATP Central processor will be configured to accommodate the initial
ALLEGIANCE configuration based upon the following guidelines. If these
guidelines are exceeded, ALLEGIANCE may not experience an acceptable level of
capacity and performance, and may be required to purchase additional hardware to
achieve an acceptable level of capacity:
o Up to five (5) switches
o Line and Infrastructure views shadowed (initial set offered)
o Combined total of 250,000 lines and trunks
o Average of five (5) changes per line per year
o 60 days history saved
o Up to 24 rate centers per switch
o 99 simultaneous active users (one user is equivalent to one open window to
one switch, the user is considered active if they are sending or receiving
information from the switch)
The CONNECTVU-ATP Front End Processor (FEP) optimal performance is limited by
the number of workstations connected to the System. An X-terminal is defined as
a X-Station or a PC running X-terminal emulation (i.e., Hummingbird exceed 6.0).
Each ATP Front-End pair can support up to 40 workstations (due to CPU
limitation). Any combination of workstation and X-terminals can be connected to
the FEP as long as the workstation equivalent is less than or is equal to 40.
The CONNECTVU-ATP will function as warranted only within these assumptions.
LUCENT TECHNOLOGIES INC. AND ALLEGIANCE TELECOM, INC. PROPRIETARY
<PAGE> 80
- ---------------------------------------------------------
CONVERSION TABLE
- ---------------------------------------------------------
- ---------------------------------------------------------
one (1) workstation = one (1) workstation equivalent
- ---------------------------------------------------------
- ---------------------------------------------------------
one (1) X-terminal = 1.6 workstations
- ---------------------------------------------------------
- ---------------------------------------------------------
0.625 X-terminals = 1 workstation
- ---------------------------------------------------------
PROJECT MANAGEMENT
PROJECT MANAGEMENT ACTIVITIES AND REQUIREMENTS
Lucent will provide project management activities as described below:
o Lucent will establish and lead a joint Lucent/ALLEGIANCE Management and
Implementation Team.
The team is composed of authorized representatives from each party who are
considered subject matter experts in the current and future CONNECTVU-ATP
functionality. Membership may also include ordering personnel for hardware
and facilities, and training, operations and maintenance personnel. The
parties project managers will co-chair this team. Their respective roles
are to set goals, review results and make major project decisions in a
timely manner. The co-chairs will deal with the specifics of the product
implementation such as detailing all tasks, developing schedules, assigning
personnel, reporting to the aforementioned Management Team on status and
controlling the implementation process. The recommended meeting interval
will be determined by the time frame of this implementation.
o Lucent Project Management will develop and update a project plan during
the installation and implementation of the Products and Software provided
in this SOW consistent with ALLEGIANCE goals with respect to their overall
program plan and the joint effort of Lucent/ALLEGIANCE. The plan will
include the necessary hardware and communication needs for the Central
processors and workstations/PCs. Lucent will also incorporate training
needs into this plan.
o The Lucent project manager will use information provided by ALLEGIANCE to
determine host and work-center requirements, high level location and
communication requirements, and the parties' respective responsibilities
for meeting these requirements.
ALLEGIANCE will provide detailed engineering including, but not limited to,
such tasks as specifying developing detailed work-center floor plan
layouts, power engineering, modem locations, cable runs, switch I/O slot
assignments, needed to fully implement the CONNECTVU-ATP configuration.
ALLEGIANCE will provide suitable office facilities, such as a desk, a
chair, telephone, personal computer, multiple analog telephone lines, and
access to a photocopier and facsimile, which are necessary for Lucent's
performance of project management activities cited herein.
LUCENT TECHNOLOGIES INC. AND ALLEGIANCE TELECOM, INC. PROPRIETARY
<PAGE> 81
Lucent will facilitate project level communication via regularly scheduled
meetings.
Periodic joint Work Breakdown Structure (WBS) reviews will be held to mark
progress against the deployment plan and identify jeopardy situations.
METHODOLOGY AND TOOLS
The project management teams will apply modern project management methods and
tools in the management of the ALLEGIANCE project, including the generation of
the Work Breakdown Structure (WBS).
To guide the implementation activities and to ensure completeness, Lucent will
develop a detailed WBS, following formal and informal meetings held with Lucent
and ALLEGIANCE subject matter experts, to identify all project tasks. The WBS
will show the tasks which must be completed to insure that a thorough and
complete job has been done through every project phase. The WBS also includes
itemized activity lists with the name(s) of the person responsible and when the
activity must be completed. Actual completion dates and jeopardy situations are
also noted. Finally, the WBS identifies critical project milestones, and is the
basis for 1) the Deployment Milestones shown in SECTION 11.4, and 2) the
detailed project plan, which includes task duration's and intervals.
Lucent will develop the appropriate detailed project plans and Critical Path
Method (CPM) schedules during the implementation of this SOW.
INITIAL SWITCH CONNECTIVITY PLAN
A connectivity plan for the first switch (switch to be selected jointly by
Lucent and ALLEGIANCE) will be developed jointly with ALLEGIANCE in accordance
with the time frame set forth in SECTION 11.4, "Deployment Milestones". The
initial switch connectivity plan will be dependent on the deployment and
availability of data networking between CONNECTVU-ATP and the selected switch.
The parties must complete the switch connectivity plan prior to ensuring that
the CONNECTVU-ATP system is able to send and receive Recent Change/Verify
information to and from the selected switch. ALLEGIANCE is responsible for
setting up the CONNECTVU-ATP software to communicate with all subsequent
switches.
DOCUMENTATION
Documentation to be provided for the CONNECTVU-ATP Software is limited to one
(1) hard copy, paper set of Related Documentation on ATP. Updates of such
Related Documentation will be delivered in the form of new pages, Section, or
entire documents depending on the magnitude of the update during the warranty
period. Subsequent updates shall be subject to any future software maintenance
contract between the parties. The list and description of CONNECTVU-Automated
Translations and Provisioning (ATP) documents is provided below in accordance
with SECTION 11.4, "Deployment Milestones".
LUCENT TECHNOLOGIES INC. AND ALLEGIANCE TELECOM, INC. PROPRIETARY
<PAGE> 82
CONNECTVU-ATP End User Job Aid (190-216-200)
This document serves as a quick reference guide for end users. It contains tasks
pertinent to the CONNECTVU-ATP environment, as well as the SUN workstation
environment. It guides users through logging on, navigating within
CONNECTVU-ATP, how to transmittal sheets, how to use the query feature, how to
create orders, and how to fix orders. This aid is used in conjunction with the
OS0505 course.
CONNECTVU -ATP Planning Guide (190-216-201)
This document is a reference guide for system level planners and as a reference
document for the Lucent account representatives. Supporting documentation and
drawings are listed.
CONNECTVU -ATP System Administration Job Aid (190-216-202)
This document serves as a quick reference guide for system administrators. It
instructs how to add and delete a switch, log in to the CONNECTVU-ATP Front End
and Central, update NIS+ tables, send broadcast messages, become a Super-user,
check link connectivity, check disk space, connect to a Recent Change & Echo
Back link, perform backups of the Front End and Central, reboot workstations &
Front End processors, and add and delete users. This aid is used in conjunction
with the OS0504 course.
CONNECTVU -ATP Operations Administration Job Aid (190-216-203)
This document serves as a quick reference guide for operations administrators.
All the procedures found in this document have been condensed to supply a quick
reference for those users who have experience running these procedures. Fully
detailed procedures can be found in the CONNECTVU-ATP Operations Training Guide.
This aid is used in conjunction with the OS0506 course.
CONNECTVU -ATP Procedures - Switch (190-216-204)
This document serves as a guide for installation procedures, as well as
integration and growth of the CONNECTVU-ATP Recent Change link & ECHO Back link.
In addition, it contains 5ESS Switch & DMS-100 switch dump procedures.
CONNECTVU -ATP Troubleshooting Guide (190-216-205)
This Trouble Shooting guide is used to assist the system administrator in
recognizing errors and providing some general guidelines on how to recover from
the errors. A special Section is dedicated to the CONNECTVU-ATP to 5ESS Switch
interface. This interface consists of CONNECTVU, DataKit(R) VCS, Data Sets,
facilities special cables, UN582/TN75C circuit boards and the 5ESS I/O channels.
CONNECTVU -ATP End User Student Guide (190-216-220)
This document serves as a student training guide, as well as a CONNECTVU-ATP
user guide. It describes the role of the various users of the system and how the
different work groups interact. It lists the benefits and features of
CONNECTVU-ATP and presents a high level view of the system topology.
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CONNECTVU -ATP System Administration Student Guide (190-216-221)
This document serves as a student training guide, as well as a CONNECTVU-ATP
user guide. It describes the CONNECTVU-ATP system purpose and features,
describes the major CONNECTVU-ATP system users, teaches the three (3) major
computer systems associated with CONNECTVU-ATP and defines the major software
elements.
CONNECTVU -ATP Operations Administration Student Guide (190-216-222).
This document serves as a student training guide for CONNECTVU-ATP Central
processor operation and administration. It describes the system hardware
components, and hardware and software configuration. The shadow database concept
is discussed long with the ATP database operations including: loading 5ESS and
DMS switches into the database, archiving data, and database synchronization
using surveillance system data. The course discusses routine responsibilities of
the system administrator along with system fail-over, backup, recovery and
software upgrades.
CONNECTVU-ATP TRAINING
Lucent will provide ALLEGIANCE the following training at no additional cost to
ALLEGIANCE for CONNECTVU-ATP:
o End User (OS0505), one (1) session, maximum ten (10) students.
o System Administration (OS0504), one (1) session, maximum ten (10)
students.
o Operations Administration (OS0506), one (1) session, maximum ten (10)
students.
The training will be available to ALLEGIANCE until 12/31/98.
ALLEGIANCE is responsible for providing classrooms and all materials described
in the following course descriptions.
CONNECTVU-ATP END USER (OS0505)
This course describes the role of the various users of the system and how the
different work groups interact. It lists the benefits and features of
CONNECTVU-ATP, presents a high-level view of the system topology, helps the user
navigate through the system, do queries and reports, call up various switch
views, describe how to use templates, enter or change specific data and schedule
events.
This course also describes how to manage work flows, explains how the order
summary feature and reference feature is accessed, generate reports, identifies
power tools, describes the concept of shadow databasing and its advantages in
the Recent Change process.
In addition, this course will teach the performance of multiple tasks across
multiple switches simultaneously, how to create reservations for certain Recent
Change/Verify in an order, how to create/modify/fix/cancel/uncancel and schedule
Recent Change/Verify, and how to use linked scenarios to automate the workflow.
Duration: three (3) days, maximum of ten (10) students.
Prerequisites: Workstation experience, Translations experience is helpful.
LUCENT TECHNOLOGIES INC. AND ALLEGIANCE TELECOM, INC. PROPRIETARY
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Key topics:
o Feature review
o Database synchronization
o Use of the workstation
o Getting started using CONNECTVU-ATP
o Using the transmittal sheet for work flow management
o Creating and managing orders Creating reports
o Use of the order summaries
o Using the linked views
o Use of the power tools
Media: This training will be conducted using the customer's (ALLEGIANCE)
CONNECTVU-ATP system.
Equipment required for suit-casing: In addition to the active system to be
provided by ALLEGIANCE, ALLEGIANCE shall provide a vu-graph machine and a PC for
the instructor and each student which is connected to CONNECTVU-ATP system and
TCP/IP access to CONNECTVU-ATP system.
Training Location: Customer site.
CONNECTVU-ATP SYSTEM ADMINISTRATION (OS0504)
This course teaches the three (3) major computer systems (Central, Front-End and
OSW) associated with CONNECTVU-ATP, defines the major software elements and
describes the shadow database concept and synchronization. It also teaches
database and data flow, gives the responsibilities required of a system
administrator, how to perform daily/weekly/monthly tasks by the system
administrator, explains procedures to contact support of the CONNECTVU-ATP
system, and performs administration for the user, for switch information, and
Recent Change/Echo Back Links information.
Duration: 2 and 1/2 days, maximum of ten (10) students.
Prerequisites: UNIX system administration experience. HPUX/SOLARIS/NIS+
experience is helpful.
Key Topics:
o Total system configuration
o System administrator role
o System hardware descriptions
o System software descriptions
o Database and data flows
o Task descriptions
o Routine task procedures such as backups, checking status
o Emergency task procedures such as restarting the system
o As-required task procedures such as password security
o Software updates
LUCENT TECHNOLOGIES INC. AND ALLEGIANCE TELECOM, INC. PROPRIETARY
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Media: This training will be conducted using the Customer's (ALLEGIANCE)
CONNECTVU-ATP system.
Equipment required for Suit-casing: In addition to the active system to be
provided by ALLEGIANCE, ALLEGIANCE shall provide a vu-graph machine, and it is
recommended that a SUN workstation be provided for the instructor and a PC
connected to CONNECTVU-ATP system be provided for each student, and TCP/IP
access to CONNECTVU-ATP system.
Training Location: Customer site.
CONNECTVU-ATP OPERATIONS ADMINISTRATION (OS0506)
This course covers CONNECTVU-ATP Central processor operation and administration.
System hardware components and hardware and software configuration are
described. The shadow database concept is discussed long with the ATP database
operations including: loading 5ESS and DMS switches into the database, archiving
data, and database synchronization using surveillance system data. The course
discusses routine responsibilities of the system administrator along with system
fail-over, backup, recovery and software upgrades.
Duration: 1 - 2 days, maximum of ten (10) students.
Prerequisites: SUN workstation experience and Basic UNIX system experience.
Key Topics:
o System configuration
o Operations administrator roles
o CONNECTVU-ATP Central configuration
o Software configuration
o System operating levels
o Application start-up and shut-down
o UNIX system level commands
o Peripheral addressing
o BUS layout
o Disk drives
o DAT drives
o Disk Mirroring
o Back-ups
o Recovery
o Database loads
o Software updates
o Call-out procedures
Media: This training will be conducted using the Customer's (ALLEGIANCE)
CONNECTVU-ATP system.
Equipment required for suit-casing: In addition to the active system to be
provided by ALLEGIANCE, ALLEGIANCE shall provide a vu-graph machine, and it is
recommended that a SUN workstation for the
LUCENT TECHNOLOGIES INC. AND ALLEGIANCE TELECOM, INC. PROPRIETARY
<PAGE> 86
instructor and a PC connected to CONNECTVU-ATP system be provided for each
student, and TCP/IP access to CONNECTVU-ATP system.
Training Location: Customer site.
DEPLOYMENT
DELIVERY
Lucent will deliver CONNECTVU-ATP software and documentation to a single
location designated by ALLEGIANCE.
INSTALLATION
The ATP application installation will commence upon completion of HP
installation and DataKit installation and provisioning in accordance with
CONNECTVU-ATP certified specifications. Lucent will provide the ATP's certified
network configurations. ALLEGIANCE is responsible for the implementation of the
physical network architecture in compliance with CONNECTVU-ATP's network
configuration.
ALLEGIANCE is responsible for connecting to appropriate communications networks,
both LAN/WAN and switch connectivity networks. CONNECTVU-ATP installation,
testing and turn up will be a joint Lucent and ALLEGIANCE responsibility.
Communications hardware and software, including DataKit and LAN/WAN
configurations, communication links, local wiring, powering, cabinet placement,
floor tile cutting, and connecting of equipment services are not included in
this SOW. ALLEGIANCE will perform these services or purchase these services from
Lucent independent of this SOW.
ALLEGIANCE is responsible for ensuring the switch software has the appropriate
features and is at the appropriate release and patch level. ALLEGIANCE is also
responsible for performing switch connectivity growth procedures necessary for
establishing communications to the CONNECTVU-ATP.
CENTRAL/SERVERS AND WORKSTATIONS/PC(S)
CONNECTVU-ATP Central/Servers and their system consoles will be delivered and
installed at the final equipment location. ALLEGIANCE is responsible for the
installation of third-party vendor products provided in this SOW as follows:
o Hewlett-Packard ("HP")
ALLEGIANCE will make arrangements for installation of the HP equipment.
Typical activities required are:
o Pre-installation site visit
o Moving the equipment to the appropriate floor locations. (It should
be noted that ALLEGIANCE will receive the equipment at its shipping
dock and move the crates to the final floor location. HP will not
transport the crates between floors or over long distances. The HP
activity only includes pushing the cabinets after uncrating to the
line-up position.)
LUCENT TECHNOLOGIES INC. AND ALLEGIANCE TELECOM, INC. PROPRIETARY
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o Uncrating of the equipment
o Mounting and cabling all units within the cabinets
o Assuring the configuration meets the general requirements of this
SOW
o Applying power
o Loading the operating system software
o Installing and executing a series of diagnostic tests to verify all
of the equipment is performing as expected
o Formatting and verifying all of the disk units
o Providing one (1) set of HP documentation
Once the HP installation is complete, Lucent will perform the following Software
installation tasks described in SECTION 11.2.3, "Communications Software On
Host" in this SOW.
o SUN Equipment
ALLEGIANCE is responsible for the installation of all SUN equipment.
Lucent will visit the ALLEGIANCE site and perform the tasks
described in SECTION 11.2.4, "Communications Software on
Front-End/Servers", once the SUN workstations are on site and
necessary network connectivity is established.
SWITCH EQUIPMENT
As an option, Lucent will assist ALLEGIANCE in planning the activities
associated with obtaining the necessary equipment to connect the switches to
CONNECTVU-ATP. The resulting project plan will include these associated
activities.
ALLEGIANCE is responsible for switch site surveys resulting in a detailed
listing of equipment for all of the 5ESS switches and DMS switches. This
detailed listing will include information on cable lengths, modem locations,
circuit information, and available I/O slots to mount circuit boards. ALLEGIANCE
will place and track all orders for such equipment. Optionally, ALLEGIANCE may
contract with LUCENT to provide these services for the 5ESS.
COMMUNICATIONS SOFTWARE ON HOST
Lucent will install and configure all of the CONNECTVU-ATP software on the host
machine, including the application software and any associated third-party
software.
Lucent will:
o Review the configuration as installed to assure all the Lucent
specifications have been met as required by the Lucent warranty. If
problems are encountered, ALLEGIANCE will have the problem corrected.
o Load all of the software required by Lucent
o Verify communications and operations with the DataKit CPM-HS boards.
o Verify normal OA&M operations such as:
o Fail-over
o Database Back-up
o Database Recovery
o Disk Mirroring
o System boot and shutdown
LUCENT TECHNOLOGIES INC. AND ALLEGIANCE TELECOM, INC. PROPRIETARY
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o Update the site dependent files within the application software with such
information as system names, DataKit dial-strings, LAN addresses, CRON
schedules, and local node DataKit database objects necessary to establish
commkit/CPM-HS data communications.
COMMUNICATIONS SOFTWARE ON FRONT-END/SERVERS
Lucent will perform the following activities as part of the workcenter
deployment service. (Application-specific task detail will be described in the
Lucent project plan.)
o Configure the databases
o Load the standard FE/Server software, including the standard operating
system and application.
o Verify operations of work-center equipment, including FE/Server PCs,
printers, and consoles. This will be done by utilizing the application
software. Lucent will assist in the isolation of any faulty component,
such as the FE/Server, PC, printer, hub, cable or router attached to the
System.
Lucent will assist ALLEGIANCE in developing configuration parameters to provide
PC access to the ATP application. ALLEGIANCE is responsible for implementing PC
configuration in their workcenters.
ACCEPTANCE TEST PLAN
CONNECTVU-ATP Functional Verification Test Plan, (hereinafter referred to as the
"Acceptance Test Plan") describes the complete set of tests, needed to verify
that installation of the CONNECTVU-ATP software meets the requirements of this
SOW. This test plan will be provided under a separate cover.
ALLEGIANCE will be responsible for providing a suitable environment (e.g.,
power, air conditioning, space, network connectivity, lighting) to allow Lucent
to proceed with installation and acceptance testing. After delivery of the
CONNECTVU-ATP software to ALLEGIANCE, Lucent will ensure that this software is
properly configured prior to acceptance by ALLEGIANCE. Lucent and ALLEGIANCE,
will jointly execute the Acceptance Test Plan. CONNECTVU-ATP warranty begins
upon successful completion, and joint sign-off (Lucent/ALLEGIANCE) of the
Acceptance Test Plan.
DEPLOYMENT MILESTONES
Lucent and ALLEGIANCE will jointly develop the Work Breakdown Structure (WBS) to
be delivered under a separate cover.
LUCENT TECHNOLOGIES INC. AND ALLEGIANCE TELECOM, INC. PROPRIETARY
<PAGE> 89
EXHIBIT B
PRICING OF CONNECTVU-AUTOMATED TRANSLATIONS AND PROVISIONING
(CONNECTVU-ATP)
FOR
ALLEGIANCE TELECOM INC.
<TABLE>
<CAPTION>
<S> <C> <C>
- ---------------------------------------------- ----------------- -------------------------------------------------------
ITEM PRICE FEATURES INCLUDED
- ---------------------------------------------- ----------------- -------------------------------------------------------
CONNECTVU-ATP Software License Fee (for $575,000 o Shadow Database for Infrastructure and
first 5 switches, up to 50,000 lines per Line-side Provisioning
switch), 5ESS or DMS-100/200 switch support o Switch Coupler
o Switch Translations via ATP GUI
- ---------------------------------------------- ----------------- -------------------------------------------------------
CONNECTVU-ATP Task Toolkit License Fee (for $250,000(1) Task Toolkit which includes:
first 5 switches, up to 50,000 lines per o Dynamic Task Builder
switch), 5ESS or DMS-100/200 switch support o Task Execution Engine
o Task Execution via Java GUI
- ---------------------------------------------- ----------------- -------------------------------------------------------
3rd Party Hardware $430,000(2) HP K420 Duplex Configuration, SUN UltraSparc FEP
Duplex, SUN UltraSparc OSW
- ---------------------------------------------- ----------------- -------------------------------------------------------
3rd Party Software $150,000(3) HP UNIX 10.20, Informix 7.23, Solaris 2.5.1
- ---------------------------------------------- ----------------- -------------------------------------------------------
Implementation and Deployment Services $150,000 o Data center & Work center Planning
o Hardware Design, Configuration & Certification
o Switch Connectivity Certification for the first
switch
o Deployment of the Task Toolkit Upgrade
- ---------------------------------------------- ----------------- -------------------------------------------------------
</TABLE>
- --------
1 This price does not include TN/OE Assignment Module and assumes Allegiance
would get TN/OE functionality from Metasolv. The Task Toolkit will be delivered
when this software feature is declared Generally Available, currently targeted
for December 1998.
2 Price is for purchase of indicated hardware from Lucent as a VAR. [Note:
Allegiance has indicated that PCs supplied by Allegiance will be used in lieu of
Sun Sparc 5 workstations. Allegiance must provide Hummingbird eXceed 6.0
software for these PCs to function with CONNECTVU-ATP.] Allegiance has indicated
a preference to go directly to the hardware suppliers for purchase of this
equipment. If this occurs, Allegiance must provide a letter to Lucent (on the
supplier's letterhead) verifying that Allegiance has purchased the appropriate
maintenance for the platform's operating system. If Allegiance does not purchase
this maintenance, Lucent is legally prevented from providing patches, fixes and
point releases for the platform operating system as part of our application
support. 3 Price is for purchase of indicated software from Lucent as a VAR.
Allegiance has indicated a preference to go directly to the software suppliers
for purchase. If this occurs, Allegiance must provide a letter to Lucent from
the third party software supplier (on the supplier's letterhead) verifying that
Allegiance has procured the necessary licenses for the third party supplier's
product. In addition, the letter must verify that Allegiance has purchased
necessary maintenance for the third party software product. The letter must
authorize Lucent to distribute fixes and patches for the third party software to
Allegiance as appropriate. If Allegiance does not purchase this maintenance,
Lucent is legally prevented from providing patches, fixes and point releases for
the third party software as part of our application support.
LUCENT TECHNOLOGIES INC. AND ALLEGIANCE TELECOM, INC. PROPRIETARY
<PAGE> 90
ITEMS REQUIRED, BUT NOT INCLUDED:
ENGINEER FURNISH, INSTALL OF CUSTOMER PACKET NETWORK
o Detailed engineering ( Switches, CONNECTVU-ATP hardware)
o Switch connectivity hardware (switch circuit packs, modems, shelves, etc.)
o LAN equipment
o Systems equipment installation (switches) Software maintenance, Hardware
maintenance, Cabling, power, frame and aisle lighting, fireproofing,
restorations, cross-connections,
o Hoisting and Hauling
o Transportation Charges
o Federal, State and Local Taxes
o Third party software maintenance (e.g., HP-UX, Informix, Solaris)
o Switch Generic Synchronization (support charge for CONNECTVU-ATP to remain
current with new switch generics)
o Feature enhancements to the switch vendor's switching generic software
(e.g., Lucent 5ESS(R) generics 5E11, 5E12 or Nortel DMS-100/200 generics
NA004, NA007) that require upgrades to CONNECTVU-ATP shall be billed
separately.
o Connection to the 5ESS(R) switches and provision of detailed MOPS
o Installation of a LAN/WAN
o Integration and migration of Lucent Products and/or Software with Third
Party Equipment and/or Third Party Software
o Technical support of Lucent Products and/or Software with Third Party
Equipment and/or Third Party Software
o Metasolv Interface
INCREMENTAL PRICING:
o Additional switch support can be provided at a price of $150K per switch.
o The pricing includes coverage for 50,000 lines per switch. If any given
switch has more than 50,000 lines, additional price will be $1 per line
(beyond 50,000 lines) in increments of 10,000 lines.
TRAINING:
o Three initial training courses are provided with CONNECTVU-ATP:
Operations, System Administration and End User training. One of each
training course (maximum of 10 students) will be provided at Allegiance's
location after hardware and all software is installed.
o
o One additional training course (maximum of 10 students) specific to Task
Toolkit will be provided at Allegiance's location after the Task Toolkit
is deployed.
OTHER ASSUMPTIONS:
o Lucent has to certify the hardware configuration if hardware is purchased
from the hardware vendor directly to guarantee working of CONNECTVU-ATP
software. Lucent will provide the detailed hardware configuration to
Lucent's HP, Informix and SUN account executives, who will work with their
counterparts supporting Allegiance.
o Allegiance will provide appropriate network connectivity, datakit
resources and project management support.
LUCENT TECHNOLOGIES INC. AND ALLEGIANCE TELECOM, INC. PROPRIETARY
<PAGE> 91
EXHIBIT C
[LUCENT TECHNOLOGIES
BELL LABS INNOVATIONS LETTERHEAD]
- --------------------------------------------------------------------------------
subject: ALLEGIANCE CONNECTVU SOLUTION - author: M. M. MCGUIRE
CHANGE MANAGEMENT PROCESS DEFINITION CB 2C245
614-860-4730
[email protected]
INTRODUCTION
CHANGE MANAGEMENT PROCESS - The purpose of this memo is to document the agreed
to Change Management Process to be used by the Allegiance and Lucent project
management team during the planning, development, implementation and deployment
of the Allegiance CONNECTVU Project. This process will be used to investigate
and/or approve requests for changes in scope identified by Allegiance and Lucent
project team members.
REVISION HISTORY
<TABLE>
<CAPTION>
<S> <C> <C> <C>
- ------------ ------------------------- -------------------------------------------------------- -----------------------
VERSION DATE REASON FOR CHANGE CHANGED BY
- ------------ ------------------------- -------------------------------------------------------- -----------------------
0.1 February 9, 1998 Initial draft M.M. McGuire
- ------------ ------------------------- -------------------------------------------------------- -----------------------
1.0 Version 1.0 for approval M.M. McGuire
- ------------ ------------------------- -------------------------------------------------------- -----------------------
</TABLE>
PROCESS DESCRIPTION
This process is used to document and approve or reject, changes to the scope of
this project. This process will be used for changes to the Statement of Work
(SOW), for changes to interface or requirements specification, or for any
changes to the baselined project plan that would significantly impact the
schedule or require additional resources to implement. Either Allegiance or
Lucent can propose changes. The change request must be submitted in writing via
the Change Request Form (see Attachment 1). This proposal should contain a
justification for the change request. If the party receiving the request
requires additional information, it shall request such information within 48
business hours of receiving the proposed change. The party who initiated the
change shall respond to the request for additional information within 48
business hours of the request for additional information. The receiving party
will respond to the change request within six business days of receipt of the
proposed change.
Allegiance and Lucent will consult together within ten working days after the
response to the proposal is received by the initiator, in order to reach
agreement on the proposed change. Once agreement is reached the change can be
implemented.
LUCENT TECHNOLOGIES INC. AND ALLEGIANCE TELECOM, INC. PROPRIETARY
<PAGE> 92
The completed Change Request Form and all supporting documentation related to
the approval or rejection of the change request will be maintained under the
Document Control Process.
PROCESS INPUTS
CHANGE REQUEST FORM - THE INITIATOR OF THE CHANGE REQUEST, MUST FILL IN PART 1
AND AS MUCH OF PART 2 AS POSSIBLE IN ORDER TO INITIATE THE CHANGE REQUEST.
PROCESS OUTPUTS
ISSUES LIST - THE COMPLETED CHANGE REQUEST FORM IS AN OUTPUT OF THE PROCESS. THE
RESULT CAN BE AN CHANGE REQUEST THAT IS APPROVED OR REJECTED.
ATTACHMENT
COPY CHANGE REQUEST FORM - THE ATTACHMENT IS AN EXAMPLE OF THE CHANGE REQUEST
FORM. THIS FORM WILL BE USED TO DOCUMENT ALL CHANGE REQUESTS THAT ARE PUT
THROUGH THE CHANGE MANAGEMENT PROCESS.
APPROVALS
Allegiance Approval Signature:
--------------------------------------------
date
Lucent Approval Signature:
------------------------------------------------
date
LUCENT TECHNOLOGIES INC. AND ALLEGIANCE TELECOM, INC. PROPRIETARY
<PAGE> 93
ATTACHMENT 1
ALLEGIANCE-LUCENT PROJECT CHANGE REQUEST
<TABLE>
<CAPTION>
PART 1 - IDENTIFICATION (FILLED IN BY INITIATOR) (SHADED PART FILLED IN BY LUCENT PM)
<S> <C> <C>
- ------------------ -------------------------------- -------------------------------- -----------------------
Initiated Date LOG #
- ------------------ -------------------------------- -------------------------------- -----------------------
Initiated By Date Rec'd by Lucent PM
- ------------------ -------------------------------- -------------------------------- -----------------------
Phone/Fax Date Rec'd by Allegiance PM
- ------------------ -------------------------------- -------------------------------- -----------------------
email Target Approval Date
- ------------------ -------------------------------- -------------------------------- -----------------------
- ------------------ -------------------------------- -------------------------------- -----------------------
Affected WBS Owner Name
-------------------------------- -------------------------------- -----------------------
Elements Phone/Fax
-------------------------------- -------------------------------- -----------------------
email
- ------------------ -------------------------------- -------------------------------- -----------------------
</TABLE>
PART 2 - PROPOSED CHANGE (FILLED IN BY INITIATOR OR PM)
<TABLE>
<CAPTION>
<S> <C>
- -------------------------------------------------------------------------------------------------------------
SUBJECT OF PROPOSED CHANGE:
- ---------------------------
Description of Proposed Chg.:
- -----------------------------
Justification of Proposed Chg.:
- -------------------------------
Expected Impact if NOT Implemented:
- -----------------------------------
use additional sheets as necessary
- -------------------------------------------------------------------------------------------------------------
</TABLE>
PART 3 - EVALUATION (FILLED IN BY OWNER)
- --------------------------------------------------------------------------------
Summary Recommendation:
Description of supporting data:
Estimated Cost/Price:
Schedule Completion:
Resources Required:.
Impact/Risk:
- --------------------------------------------------------------------------------
PART 4 - PM REVIEWED
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------- ---------------------
Allegiance PM: Date:
- -------------------------------------------------------------------------------------- ---------------------
Lucent PM: Date:
- -------------------------------------------------------------------------------------- ---------------------
</TABLE>
LUCENT TECHNOLOGIES INC. AND ALLEGIANCE TELECOM, INC. PROPRIETARY
<PAGE> 94
PART 5 - APPROVALS/REJECT SIGNATURE
<TABLE>
<S> <C> <C>
- -------------------------------------------------------------------------------------- ---------------------
Allegiance. Date:
Signature:
- -------------------------------------------------------------------------------------- ---------------------
Disposition: Approved
Rejected
- -------------------------------------------------------------------------------------- ---------------------
Lucent Signature: Date:
- -------------------------------------------------------------------------------------- ---------------------
Disposition: Approved
Rejected
- -------------------------------------------------------------------------------------- ---------------------
</TABLE>
<PAGE> 1
EXHIBIT 12.1
<TABLE>
<CAPTION>
ALLEGIANCE TELECOM, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
PRO FORMA
PERIOD PERIOD
FROM INCEPTION PRO FORMA FROM INCEPTION
THREE MONTHS (APRIL 22, 1997) THREE MONTHS (APRIL 22, 1997)
ENDED THROUGH ENDED THROUGH
MARCH 31, DECEMBER 31, MARCH 31, DECEMBER 31,
1998 1997 1998 1997
------------ ---------------- ------------- -------------
<S> <C> <C> <C> <C>
Earnings:
Net loss $ (7,416,273) $ (3,478,000) $ (10,436,975) $(26,023,119)
Add: Fixed charges 4,669,079 -- 7,689,781 22,545,119
------------ ---------------- ------------- -------------
(2,747,194) (3,478,000) (2,747,194) (3,478,000)
Fixed charges:
Interest in indebtedness 4,951,366 -- 7,848,284 21,691,023
Amortization of debt discount and debt
issuance costs 185,247 -- 309,031 854,096
Interest portion of rental and lease
expense -- -- -- --
------------ ---------------- ------------- -------------
5,136,613 -- 8,157,315 22,546,119
Deficiency of earnings available to
cover fixed charges $ (7,883,807) $ (3,478,000) $ (10,904,509) $ (26,023,119)
============ ================ ============= =============
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Registration Statement of our report dated April 24, 1998, for
the three months ended March 31, 1998, and for the period from inception (April
22, 1997) through December 31, 1997, and to all references to our Firm included
in this Amendment No. 1 to the Registration Statement on Form S-4.
ARTHUR ANDERSEN LLP
Dallas, Texas
May 5, 1998
<PAGE> 1
EXHIBIT 25.1
================================================================================
FORM T-1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2) [ ]
--------------------------------------
THE BANK OF NEW YORK
(Exact name of trustee as specified in its charter)
New York 13-5160382
(State of incorporation (I.R.S. employer
if not a U.S. national bank) identification no.)
48 Wall Street, New York, N.Y. 10286
(Address of principal executive offices) (Zip code)
--------------------------------------
Allegiance Telecom, Inc.
(Exact name of obligor as specified in its charter)
Delaware 75-2721491
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
1950 Stemmons Freeway
Suite 3026
Dallas, Texas 75207
(Address of principal executive offices) (Zip code)
--------------------------------------
11-3/4 Senior Discount Notes due 2008, Series B
(Title of the indenture securities)
================================================================================
<PAGE> 2
1. GENERAL INFORMATION. FURNISH THE FOLLOWING INFORMATION AS TO THE
TRUSTEE:
(a) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISING AUTHORITY TO
WHICH IT IS SUBJECT.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Name Address
- --------------------------------------------------------------------------------
<S> <C>
Superintendent of Banks of the State of 2 Rector Street, New York,
New York N.Y. 10006, and Albany, N.Y. 12203
Federal Reserve Bank of New York 33 Liberty Plaza, New York,
N.Y. 10045
Federal Deposit Insurance Corporation Washington, D.C. 20429
New York Clearing House Association New York, New York 10005
</TABLE>
(b) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS.
Yes.
2. AFFILIATIONS WITH OBLIGOR.
IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH
AFFILIATION.
None.
16. LIST OF EXHIBITS.
EXHIBITS IDENTIFIED IN PARENTHESES BELOW, ON FILE WITH THE COMMISSION,
ARE INCORPORATED HEREIN BY REFERENCE AS AN EXHIBIT HERETO, PURSUANT TO
RULE 7a-29 UNDER THE TRUST INDENTURE ACT OF 1939 (THE "ACT") AND 17
C.F.R. 229.10(d).
1. A copy of the Organization Certificate of The Bank of New York
(formerly Irving Trust Company) as now in effect, which
contains the authority to commence business and a grant of
powers to exercise corporate trust powers. (Exhibit 1 to
Amendment No. 1 to Form T-1 filed with Registration Statement
No. 33-6215, Exhibits 1a and 1b to Form T-1 filed with
Registration Statement No. 33-21672 and Exhibit 1 to Form T-1
filed with Registration Statement No. 33-29637.)
4. A copy of the existing By-laws of the Trustee. (Exhibit 4 to
Form T-1 filed with Registration Statement No. 33-31019.)
6. The consent of the Trustee required by Section 321(b) of the
Act. (Exhibit 6 to Form T-1 filed with Registration Statement
No. 33-44051.)
7. A copy of the latest report of condition of the Trustee
published pursuant to law or to the requirements of its
supervising or examining authority.
-2-
<PAGE> 3
SIGNATURE
Pursuant to the requirements of the Act, the Trustee, The Bank of New
York, a corporation organized and existing under the laws of the State of New
York, has duly caused this statement of eligibility to be signed on its behalf
by the undersigned, thereunto duly authorized, all in The City of New York, and
State of New York, on the 4th day of May, 1998.
THE BANK OF NEW YORK
By: /s/ JAMES W.P. HALL
------------------------------
Name: JAMES W.P. HALL
Title: VICE PRESIDENT
- 3 -
<PAGE> 4
Exhibit 7
- --------------------------------------------------------------------------------
Consolidated Report of Condition of
THE BANK OF NEW YORK
of 48 Wall Street, New York, N.Y. 10286
And Foreign and Domestic Subsidiaries,
a member of the Federal Reserve System, at the close of business December 31,
1997, published in accordance with a call made by the Federal Reserve Bank of
this District pursuant to the provisions of the Federal Reserve Act.
<TABLE>
<CAPTION>
Dollar Amounts
ASSETS in Thousands
<S> <C>
Cash and balances due from depos-
itory institutions:
Noninterest-bearing balances and
currency and coin ................. $ 5,742,986
Interest-bearing balances .......... 1,342,769
Securities:
Held-to-maturity securities ........ 1,099,736
Available-for-sale securities ...... 3,882,686
Federal funds sold and Securities pur-
chased under agreements to resell.... 2,568,530
Loans and lease financing
receivables:
Loans and leases, net of unearned
income .................35,019,608
LESS: Allowance for loan and
lease losses ..............627,350
LESS: Allocated transfer risk
reserve..........................0
Loans and leases, net of unearned
income, allowance, and reserve 34,392,258
Assets held in trading accounts ...... 2,521,451
Premises and fixed assets (including
capitalized leases) ................ 659,209
Other real estate owned .............. 11,992
Investments in unconsolidated
subsidiaries and associated
companies .......................... 226,263
Customers' liability to this bank on
acceptances outstanding ............ 1,187,449
Intangible assets .................... 781,684
Other assets ......................... 1,736,574
-----------
Total assets ......................... $56,153,587
===========
LIABILITIES
Deposits:
In domestic offices ................ $27,031,362
Noninterest-bearing ......11,899,507
Interest-bearing .........15,131,855
In foreign offices, Edge and
Agreement subsidiaries, and IBFs ... 13,794,449
Noninterest-bearing .........590,999
Interest-bearing .........13,203,450
Federal funds purchased and Securities
sold under agreements to repurchase. 2,338,881
Demand notes issued to the U.S.
Treasury ........................... 173,851
Trading liabilities .................. 1,695,216
Other borrowed money:
With remaining maturity of one year
or less .......................... 1,905,330
With remaining maturity of more than
one year through three years...... 0
With remaining maturity of more than
three years ...................... 25,664
Bank's liability on acceptances exe-
cuted and outstanding .............. 1,195,923
Subordinated notes and debentures .... 1,012,940
Other liabilities .................... 2,018,960
-----------
Total liabilities .................... 51,192,576
-----------
EQUITY CAPITAL
Common stock ......................... 1,135,284
Surplus .............................. 731,319
Undivided profits and capital
reserves ........................... 3,093,726
Net unrealized holding gains
(losses) on available-for-sale
securities ......................... 36,866
Cumulative foreign currency transla-
tion adjustments ................... ( 36,184)
-----------
Total equity capital ................. 4,961,011
-----------
Total liabilities and equity
capital ............................ $56,153,587
===========
</TABLE>
I, Robert E. Keilman, Senior Vice President and Comptroller of the
above-named bank do hereby declare that this Report of Condition has been
prepared in conformance with the instructions issued by the Board of Governors
of the Federal Reserve System and is true to the best of my knowledge and
belief.
Robert E. Keilman
We, the undersigned directors, attest to the correctness of this Report of
Condition and declare that it has been examined by us and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the Board of Governors of the Federal Reserve System and is true and
correct.
Thomas A. Renyi
Alan R. Griffith Directors
J. Carter Bacot
- --------------------------------------------------------------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S MARCH 31, 1998 CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 221,678,116
<SECURITIES> 35,916,586
<RECEIVABLES> 307,430
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 258,298,592
<PP&E> 32,890,448
<DEPRECIATION> 221,063
<TOTAL-ASSETS> 300,227,692
<CURRENT-LIABILITIES> 5,682,638
<BONDS> 247,329,420
52,075,623
0
<COMMON> 0
<OTHER-SE> (13,043,539)
<TOTAL-LIABILITY-AND-EQUITY> 300,227,692
<SALES> 0
<TOTAL-REVENUES> 202,925
<CGS> 0
<TOTAL-COSTS> 924,609
<OTHER-EXPENSES> 208,424
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,669,079
<INCOME-PRETAX> (7,416,273)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,416,273)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,416,273)
<EPS-PRIMARY> (8,705,639)
<EPS-DILUTED> (8,705,639)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997 AND FOR THE
PERIOD FROM INCEPTION (APRIL 22, 1997) TO DECEMBER 31, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-22-1997
<PERIOD-END> DEC-31-1997
<CASH> 5,726,359
<SECURITIES> 0
<RECEIVABLES> 4,310
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,975,821
<PP&E> 23,912,659
<DEPRECIATION> 12,639
<TOTAL-ASSETS> 30,047,014
<CURRENT-LIABILITIES> 3,929,700
<BONDS> 0
30,455,214
0
<COMMON> 0
<OTHER-SE> (4,337,900)
<TOTAL-LIABILITY-AND-EQUITY> 30,047,014
<SALES> 0
<TOTAL-REVENUES> 403
<CGS> 0
<TOTAL-COSTS> 174,113
<OTHER-EXPENSES> 12,639
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,478,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,478,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,478,000)
<EPS-PRIMARY> (4,338,000)
<EPS-DILUTED> (4,338,000)
</TABLE>
<PAGE> 1
EXHIBIT 99.1
LETTER OF TRANSMITTAL
TO TENDER FOR EXCHANGE
11 3/4% SENIOR DISCOUNT NOTES DUE 2008
OF
ALLEGIANCE TELECOM, INC.
PURSUANT TO THE PROSPECTUS DATED _________ __, 1998
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON _________
__, 1998 UNLESS EXTENDED.
TO: THE BANK OF NEW YORK (THE "EXCHANGE AGENT")
By Registered or Certified Mail
The Bank of New York
101 Barclay Street, 7-E
New York, New 10286
Attn: Reorganization Section-7-E
By Hand or Overnight Courier:
The Bank of New York
101 Barclay Street, 7-E
Corporate Trust Services Window
Ground Level
New York, New York 10286
Attn: Reorganization Section-7-E
By Facsimile:
(For Eligible Institutions only)
(212) 815-6339
Confirm by telephone:
(212) 815-2742
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET
FORTH ABOVE OR TRANSMISSION OF THIS LETTER OF TRANSMITTAL VIA A FACSIMILE NUMBER
OTHER THAN THE ONE LISTED ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
The instructions accompanying this Letter of Transmittal should be read
carefully before this Letter of Transmittal is completed.
The undersigned acknowledges receipt of the Prospectus, dated ________
__, 1998 (the "Prospectus") of Allegiance Telecom, Inc. (the "Company") and the
related Letter of Transmittal (the "Letter of Transmittal"), which together
describe the Company's offer (the "Exchange Offer") to exchange $1,000 principal
amount at maturity of its Series B 11 3/4% Senior Discount Notes due 2008 (the
"Exchange Notes"), which have been registered under the Securities Act of 1933,
as amended (the "Securities Act"), pursuant to a Registration Statement, for
each $1,000 principal amount at maturity of its outstanding 11 3/4% Senior
Discount Notes due 2008 (the "Notes"), of which $445,000,000 principal amount at
maturity is outstanding. The term "Expiration Date" shall mean 5:00 p.m., New
York City time, on ___________ __, 1998, unless the Company, in its sole
discretion, extends the Exchange Offer, in which case the term shall mean the
latest date and time to which the Exchange Offer is extended. The term "holder"
with respect to the Exchange Offer means any person in whose name Notes are
registered on the books of the Company or any other person who has obtained a
properly completed bond power from the registered holder. Capitalized terms used
but not defined herein have the respective meanings set forth in the Prospectus.
<PAGE> 2
This Letter of Transmittal is to be used by holders of Notes if (i)
certificates representing the Notes are to be physically delivered to the
Exchange Agent herewith, (ii) tender of the Notes is to be made by book-entry
transfer to the Exchange Agent's account at The Depository Trust Company (the
"Book-Entry Transfer Facility") pursuant to the procedures set forth in the
Prospectus under the caption "The Exchange Offer--Procedures for Tendering" by
any financial institution that is a participant in the Book-Entry Transfer
Facility and whose name appears on a security position listing as the owner of
Notes to the extent provided herein or (iii) tender of the Notes is to be made
according to the guaranteed delivery procedures described in the Prospectus
under the caption "The Exchange Offer--Guaranteed Delivery Procedures." See
Instruction 2. Delivery of documents to the Book-Entry Transfer Facility does
not constitute delivery to the Exchange Agent.
Notwithstanding the foregoing, valid acceptance of the terms of the
Exchange Offer may be effected by a participant in the Book-Entry Transfer
Facility tendering Notes through the Book-Entry Transfer Facility's Automated
Tender Offer Program ("ATOP") where the Exchange Agent receives an Agent's
Message prior to the Expiration Date. Accordingly, such participant must
electronically transmit its acceptance to the Book-Entry Transfer Facility
through ATOP, and then the Book-Entry Transfer Facility will edit and verify the
acceptance, execute a book-entry delivery to the Exchange Agent's account at the
Book-Entry Transfer Facility and send an Agent's Message to the Exchange Agent
for its acceptance. By tendering through ATOP, participants in the Book-Entry
Transfer Facility will expressly acknowledge receipt of this Letter of
Transmittal and agree to be bound by its terms and the Company will be able to
enforce such agreement against such Book-Entry Transfer Facility participants.
The undersigned has completed, executed and delivered this Letter of
Transmittal to indicate the action the undersigned desires to take with respect
to the Exchange Offer. Holders who wish to tender their Notes must complete this
letter in its entirety.
[ ] CHECK HERE IF TENDERED NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER
MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE BOOK-
ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution:
-----------------------------------------
Account Number:
--------------------------------------------------------
Transaction Code Number:
-----------------------------------------------
Principal Amount at Maturity of Tendered Notes:
------------------------
If holders desire to tender Notes pursuant to the Exchange Offer and
(i) time will not permit this Letter of Transmittal, certificates representing
Notes, an Agent's Message or other required documents to reach the Exchange
Agent prior to the Expiration Date, or (ii) the procedures for book-entry
transfer cannot be completed prior to the Expiration Date, such holders may
effect a tender of such Notes in accordance with the guaranteed delivery
procedures set forth in the Prospectus under the caption "The Exchange
Offer--Guaranteed Delivery Procedures." See Instruction 2 below.
[ ] CHECK HERE IF TENDERED NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE
OF GUARANTEED DELIVERY DELIVERED TO THE EXCHANGE AGENT AND COMPLETE THE
FOLLOWING (See Instruction 2):
Name of Registered or Acting Holder(s):
--------------------------------
Window Ticket No. (if any):
--------------------------------------------
Date of Execution of Notice of Guaranteed Delivery:
--------------------
Name of Eligible Institution
that Guaranteed Delivery:
----------------------------------------------
If Delivered by Book-Entry Transfer,
the Account Number:
----------------------------------------------------
Transaction Code Number:
-----------------------------------------------
- 2 -
<PAGE> 3
[ ] CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO.
PLEASE NOTE: THE COMPANY HAS AGREED THAT, FOR A PERIOD OF 180 DAYS
AFTER THE EXPIRATION DATE, IT WILL MAKE COPIES OF THE PROSPECTUS
AVAILABLE TO ANY PARTICIPATING BROKER-DEALER FOR USE IN CONNECTION WITH
RESALES OF THE EXCHANGE NOTES.
Name:
------------------------------------------------------------------
Address:
---------------------------------------------------------------
Attention:
-------------------------------------------------------------
List below the Notes to which this Letter of Transmittal relates. If
the space provided below is inadequate, the certificate numbers and principal
amount of Notes should be listed on a separate signed schedule affixed hereto.
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL CAREFULLY BEFORE COMPLETING
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
BOX 1
DESCRIPTION OF NOTES
- ----------------------------------------------------------------------------------------------
Aggregate Principal Principal Amount at
Name(s) and Address(es) of Amount at Maturity Maturity Tendered (must be
Registered Holder(s) Certificate Represented an Integral Multiple
(Please fill in, if blank) Number(s)* by Certificate(s) of $1,000)**
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total
- ----------------------------------------------------------------------------------------------
</TABLE>
* Need not be completed by holders tendering by book-entry transfer.
** Unless indicated in the column labeled "Principal Amount at Maturity
Tendered," any tendering holder of Notes will be deemed to have tendered
the entire aggregate principal amount at maturity represented by the column
labeled "Aggregate Principal Amount at Maturity Represented by
Certificate(s)." If the space provided above is inadequate, list the
certificate numbers and principal amounts on a separate signed schedule and
affix the list to this Letter of Transmittal.
The minimum permitted tender is $1,000 in principal amount at maturity of
Notes. All other tenders must be in integral multiples of $1,000.
- 3 -
<PAGE> 4
BOX 2
SPECIAL REGISTRATION
INSTRUCTIONS
(See Instructions 4, 5 and 6)
To be completed ONLY if certificates for Notes in a principal amount not
rendered or Exchange Notes issued in exchange for Notes accepted for exchange,
are to be issued in a name other than the name appearing in Box 1 above.
Issue certificate(s) to:
Name
----------------------------------------------------------------------------
(Please Print)
Address
-------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Include Zip Code)
- --------------------------------------------------------------------------------
(Tax Identification or Social Security Number)
BOX 3
SPECIAL DELIVERY
INSTRUCTIONS
(See Instructions 4, 5 and 6)
To be completed ONLY if certificates for Notes in a To be completed ONLY if
certificates for Notes in a principal amount not tendered, or Exchange Notes
issued principal amount not tendered, or Exchange Notes issued in in exchange
for Notes accepted for exchange, are to be exchange for Notes accepted for
exchange, are to be sent to issued in a name other than the name appearing in
Box 1 an address other than the address appearing in Box 1 above, above. or if
Box 2 is filled in, to an address other than the address appearing in Box 2.
Deliver certificate(s) to:
Name
----------------------------------------------------------------------------
(Please Print)
Address
-------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Include Zip Code)
- --------------------------------------------------------------------------------
(Tax Identification or Social Security Number)
BOX 4
BROKER-DEALER STATUS
[ ] Check this box if the Beneficial Owner of the Notes is a Participating
Broker-Dealer and such Participating Broker- Dealer acquired the Notes
for its own account as a result of market-making activities or other
trading activities. IF THIS BOX IS CHECKED, PLEASE SEND A COPY OF THIS
LETTER OF TRANSMITTAL TO DENNIS M. MAUNDER, CONTROLLER, VIA FACSIMILE:
(214) 853-7101.
- 4 -
<PAGE> 5
NOTE: SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
Subject to the terms and conditions of the Exchange Offer, the undersigned
hereby tenders to the Company, the principal amount of Notes indicated above.
Subject to and effective upon the acceptance for exchange of the principal
amount of Notes tendered in accordance with this Letter of Transmittal, the
undersigned sells, assigns and transfers to, or upon the order of, the Company
all right, title and interest in and to the Notes tendered hereby. The
undersigned hereby irrevocably constitutes and appoints the Exchange Agent its
agent and attorney-in-fact (with full knowledge that the Exchange Agent also
acts as the agent of the Company) with respect to the tendered Notes with the
full power of substitution to (i) present such Notes and all evidences of
transfer and authenticity to, or transfer ownership of, such Notes on the
account books maintained by the Book-Entry Transfer Facility to, or upon, the
order of, the Company, (ii) deliver certificates for such Notes to the Company
and deliver all accompanying evidences of transfer and authenticity to, or upon
the order of, the Company and (iii) present such Notes for transfer on the books
of the Company and receive all benefits and otherwise exercise all rights of
beneficial ownership of such Notes, all in accordance with the terms of the
Exchange Offer.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to tender, sell, assign and transfer the Notes tendered
hereby and that the Company will acquire good, valid and unencumbered title
thereto, free and clear of all liens, restrictions, charges and encumbrances and
not subject to any adverse claims, when the same are acquired by the Company.
The undersigned hereby further represents that any Exchange Notes acquired in
exchange for Notes tendered hereby will have been acquired in the ordinary
course of business of the person receiving such Exchange Notes, whether or not
such person is the undersigned, that neither the undersigned nor any other such
person has any arrangement or understanding with any person to participate in
the distribution of such Exchange Notes and that neither the undersigned nor any
such other person is an "affiliate," as defined in Rule 405 under the Securities
Act, of the Company. In addition, the undersigned and any such person
acknowledge that (a) any person participating in the Exchange Offer for the
purpose of distributing the Exchange Notes must, in the absence of an exemption
therefrom, comply with the registration and prospectus delivery requirements of
the Securities Act in connection with a secondary resale of the Exchange Notes
and cannot rely on the position of the staff of the Securities and Exchange
Commission enunciated in no-action letters and (b) failure to comply with such
requirements in such instance could result in the undersigned or such person
incurring liability under the Securities Act for which the undersigned or such
person is not indemnified by the Company. The undersigned will, upon request,
execute and deliver any additional documents deemed by the Exchange Agent or the
Company to be necessary or desirable to complete the assignment, transfer and
purchase of the Notes tendered hereby. If the undersigned is not a
broker-dealer, the undersigned represents that it is not engaged in and does not
intend to engage in, a distribution of Exchange Notes. If the undersigned is a
broker-dealer that will receive Exchange Notes for its own account in exchange
for Notes that were acquired as a result of market-making activities or other
trading activities, it acknowledges that it will deliver a Prospectus in
connection with any resale of such Exchange Notes, however, by so acknowledging
and by delivering a Prospectus, the undersigned will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act. Unless
otherwise notified in accordance with the instructions set forth herein in Box 4
under "Broker-Dealer Status," the Company will assume that the undersigned is
not a Participating Broker-Dealer.
For purposes of the Exchange Offer, the Company shall be deemed to have
accepted validly tendered Notes when, as and if the Company has given notice
thereof to the Exchange Agent.
If any Notes tendered herewith are not accepted for exchange pursuant to
the Exchange Offer for any reason, certificates for any such unaccepted Notes
will be returned, without expense, to the undersigned at the address shown below
or to a different address as may be indicated herein in Box 3 under "Special
Delivery Instructions" as promptly as practicable after the Expiration Date.
All authority conferred or agreed to be conferred by this Letter of
Transmittal shall survive the death, incapacity or dissolution of the
undersigned, and every obligation of the undersigned under this Letter of
Transmittal shall be binding upon the undersigned's heirs, personal
representative, successors and assigns.
- 5 -
<PAGE> 6
The undersigned understands that tenders of Notes pursuant to the
procedures described under the caption "The Exchange Offer--Procedures for
Tendering" in the Prospectus and in the instructions hereto will constitute a
binding agreement between the undersigned and the Company upon the terms and
subject to the conditions of the Exchange Offer, subject only to withdrawal of
such tenders on the terms set forth in the Prospectus under the caption "The
Exchange Offer--Withdrawal of Tenders."
Unless otherwise indicated in Box 2 under "Special Registration
Instructions," please issue the certificates representing the Exchange Notes
issued in exchange for the Notes accepted for exchange and any certificates for
Notes not tendered or not exchanged, in the name(s) of the registered holder of
the Notes appearing in Box 1 above. Similarly, unless otherwise indicated in Box
3 under "Special Delivery Instructions," please send the certificates, if any,
representing the Exchange Notes issued in exchange for the Notes accepted for
exchange and any certificates for Notes not tendered or not exchanged (and
accompanying documents, as appropriate) to the undersigned at the address shown
below in the undersigned's signature(s). In the event that the box entitled
"Special Registration Instructions" and the box entitled "Special Delivery
Instructions" both are completed, please issue the certificates representing the
Exchange Notes issued in exchange for the Notes accepted for exchange in the
name(s) of, and return any certificates for Notes not tendered or not exchanged
to, the person(s) so indicated. The undersigned understands that the Company has
no obligation pursuant to the "Special Registration Instructions" and "Special
Delivery Instructions" to transfer any Notes from the name of the registered
holder(s) thereof if the Company does not accept for exchange any of the Notes
so tendered.
Holders who wish to tender their Notes and (i) whose Notes are not
immediately available or (ii) who cannot deliver the Notes, an Agent's Message,
this Letter of Transmittal or any other documents required hereby to the
Exchange Agent prior to the Expiration Date, may tender their Notes according to
the guaranteed delivery procedures set forth in the Prospectus under the caption
"The Exchange Offer--Guaranteed Delivery Procedures." See Instruction 2.
- 6 -
<PAGE> 7
The lines below must be signed by the registered holder(s) exactly as
their name(s) appear(s) on the Notes or by person(s) authorized to become
registered holder(s) by a properly completed bond power from the registered
holder(s), a copy of which must be transmitted with this Letter of Transmittal.
If Notes to which this Letter of Transmittal relate are held of record by two or
more joint holders, then all such holders must sign this Letter of Transmittal.
SIGNATURES
x
- --------------------------------------------------------------- --------------
Date
x
- --------------------------------------------------------------- ---------------
Date
Area Code and Telephone Number:
-------------------------------------------------
If signature is by a trustee, executor, administrator, guardian,
attorney-in-fact, officer of a corporation or other person acting in a fiduciary
or representative capacity, then such person must (i) set forth his or her full
title below and (ii) submit evidence satisfactory to the Company of such
person's authority so to act. See Instruction 5.
Name(s):
------------------------------------------------------------------------
(Please Print)
Capacity:
-----------------------------------------------------------------------
Address:
------------------------------------------------------------------------
(Include Zip Code)
MEDALLION SIGNATURE GUARANTEE (If
required by Instruction 5)
Certain Signatures must be Guaranteed by an Eligible Institution
Signature(s) Guaranteed by an Eligible Institution:
-----------------------------
(Authorized Signature)
- --------------------------------------------------------------------------------
(Title)
- --------------------------------------------------------------------------------
(Name of Firm)
- --------------------------------------------------------------------------------
(Address, Include Zip Code)
- --------------------------------------------------------------------------------
(Area Code and Telephone Number)
- 7 -
<PAGE> 8
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS
OF THE EXCHANGE OFFER
1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND CERTIFICATES FOR
NOTES OR BOOK-ENTRY CONFIRMATIONS. Certificates representing the tendered Notes
(or a confirmation of book-entry transfer of such Notes into the Exchange
Agent's account with the Book-Entry Transfer Facility), as well as a properly
completed and duly executed copy of this Letter of Transmittal (or, in the case
of a book-entry transfer, an Agent's Message), a Substitute Form W-9 and any
other documents required by this Letter of Transmittal must be received by the
Exchange Agent at its address set forth herein prior to the Expiration Date. The
method of delivery of certificates for Notes and all other required documents is
at the election and sole risk of the tendering holder and delivery will be
deemed made only when actually received by the Exchange Agent. If delivery is by
mail, registered mail with return receipt requested, properly insured, is
recommended. As an alternative to delivery by mail, the holder may wish to use
an overnight or hand delivery service. In all cases, sufficient time should be
allowed to assure timely delivery. Neither the Company nor the Exchange Agent is
under an obligation to notify any tendering holder of the Company's acceptance
of tendered Notes prior to the completion of the Exchange Offer.
2. GUARANTEED DELIVERY PROCEDURES. Holders who wish to tender
their Notes but whose Notes are not immediately available and who cannot deliver
their certificates for Notes (or comply with the procedures for book-entry
transfer prior to the Expiration Date), the Letter of Transmittal and any other
documents required by the Letter of Transmittal to the Exchange Agent prior to
the Expiration Date must tender their Notes according to the guaranteed delivery
procedures set forth below. Pursuant to such procedures:
(i) such tender must be made by or through a firm
which is a member of a registered national securities exchange
or of the National Association of Securities Dealers, Inc., or
a commercial bank or trust company having an office or
correspondent in the United States (an "Eligible
Institution");
(ii) prior to the Expiration Date, the Exchange Agent
must have received from the holder and the Eligible
Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail, or hand
delivery) setting forth the name and address of the holder,
the certificate number or numbers of the tendered Notes, and
the principal amount of tendered Notes and stating that the
tender is being made thereby and guaranteeing that, within
three New York Stock Exchange trading days after the
Expiration Date, the Letter of Transmittal (or facsimile
thereof) (or, in the case of a book-entry transfer, an Agent's
Message), together with the tendered Notes (or a confirmation
of book-entry transfer of such Notes into the Exchange Agent's
account with the Book-Entry Transfer Facility) and any other
required documents will be deposited by the Eligible
Institution with the Exchange Agent; and
(iii) the certificates representing the tendered
Notes in proper form for transfer (or a confirmation of
book-entry transfer of such Notes into the Exchange Agent's
account with the Book-Entry Transfer Facility), together with
this Letter of Transmittal (or facsimile thereof), properly
completed and duly executed, with any required signature
guarantees (or, in the case of a book-entry transfer, an
Agent's Message) and all other documents required by the
Letter of Transmittal must be received by the Exchange Agent
within three New York Stock Exchange trading days after the
Expiration Date.
Failure to complete the guaranteed delivery procedures
outlined above will not, of itself, affect the validity or effect a revocation
of any Letter of Transmittal form properly completed and executed by a Holder
who attempted to use the guaranteed delivery procedure.
3. TENDER BY HOLDER. Only a registered holder of Notes may
tender such Notes in the Exchange Offer. Any beneficial owner of Notes who is
not the registered holder and who wishes to tender should arrange with such
registered holder to execute and deliver this Letter of Transmittal on such
owner's behalf or must, prior to completing and executing this Letter of
Transmittal and delivering such Notes, either make appropriate arrangements to
register ownership of the Notes in such owner's name or obtain a properly
completed bond power from the registered holder.
- 8 -
<PAGE> 9
4. PARTIAL TENDERS. Tenders of Notes will be accepted only in
integral multiples of $1,000 in principal amount at maturity. If less than the
entire principal amount at maturity of Notes is tendered, the tendering holder
should fill in the principal amount tendered in the column labeled "Principal
Amount at Maturity Tendered" of the box entitled "Description of Notes" (Box 1)
above. The entire principal amount at maturity of Notes delivered to the
Exchange Agent will be deemed to have been tendered unless otherwise indicated.
If the entire principal amount of Notes is not tendered, Notes for the principal
amount at maturity of Notes not tendered and Exchange Notes exchanged for any
Notes tendered will be sent to the holder at his or her registered address,
unless a different address is provided in the appropriate box on this Letter of
Transmittal, as soon as practicable following the Expiration Date.
5. SIGNATURES ON THE LETTER OF TRANSMITTAL; BOND POWERS AND
ENDORSEMENTS; MEDALLION GUARANTEE OF SIGNATURE. If this Letter of Transmittal is
signed by the registered holder(s) of the Notes tendered herewith, the
signatures must correspond with the name(s) as written on the face of the
tendered Notes without alteration, enlargement, or any change whatsoever.
If any of the tendered Notes are owned of record by two or
more joint owners, all such owners must sign this Letter of Transmittal. If any
tendered Notes are held in different names on several Notes, it will be
necessary to complete, sign, and submit as many separate copies of the Letter of
Transmittal documents as there are names in which tendered Notes are held.
If this Letter of Transmittal is signed by the registered
holder, and Exchange Notes are to be issued and any untendered or unaccepted
principal amount of Notes are to be reissued or returned to the registered
holder, then, the registered holder need not and should not endorse any tendered
Notes nor provide a separate bond power. In any other case, the registered
holder must either properly endorse the Notes tendered or transmit a properly
completed separate bond power with this Letter of Transmittal (executed exactly
as the name(s) of the registered holder(s) appear(s) on such Notes), with the
signature(s) on the endorsement or bond power guaranteed by an Eligible
Institution unless such certificates or bond powers are signed by an Eligible
Institution.
If this Letter of Transmittal or any Notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations, or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing and evidence satisfactory
to the Company of their authority to so act must be submitted with this Letter
of Transmittal.
No medallion signature guarantee is required if this Letter of
Transmittal is signed by the registered holder(s) of the Notes tendered herewith
and the Exchange Notes (and any Notes not tendered or not accepted) are to be
issued directly to such registered holder(s) and neither the "Special
Registration Instructions" (Box 2) nor the "Special Delivery Instructions" (Box
3) has been completed. In all other cases, all signatures on this Letter of
Transmittal must be guaranteed by an Eligible Institution.
6. SPECIAL REGISTRATION AND DELIVERY INSTRUCTIONS. Tendering
holders should indicate, in the applicable box, the name and address in which
the Exchange Notes and/or substitute Notes for principal amounts not tendered or
not accepted for exchange are to be sent, if different from the name and address
or account of the person signing this Letter of Transmittal. In the case of
issuance in a different name, the employer identification number or social
security number of the person named must also be indicated and the tendering
holders should complete the applicable box.
If no such instructions are given, the Exchange Notes (and any
Notes not tendered or not accepted) will be issued in the name of and sent to
the registered holder of the Notes.
7. TRANSFER TAXES. The Company will pay all transfer taxes, if
any, applicable to the sale and transfer of Notes to it or its order pursuant to
the Exchange Offer. If, however, a transfer tax is imposed for any reason other
than the transfer and sale of Notes to the Company or its order pursuant to the
Exchange Offer, then the amount of any such transfer taxes (whether imposed on
the registered holder or on any other person) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption from
taxes therefrom is not submitted with this Letter of Transmittal, the amount of
transfer taxes will be billed directly to such tendering holder.
- 9 -
<PAGE> 10
Except as provided in this Instruction 7, it will not be
necessary for transfer tax stamps to be affixed to the Notes listed in this
Letter of Transmittal.
8. TAX IDENTIFICATION NUMBER. Federal income tax law required
that a holder of any Notes which are accepted for exchange must provide the
Company (as payor) with its correct taxpayer identification number ("TIN"),
which, in the case of a holder who is an individual, is his or her social
security number. If the Company is not provided with the correct TIN, the holder
may be subject to a $50 penalty imposed by Internal Revenue Service. (If
withholding results in an over-payment of taxes, a refund may be obtained.)
Certain holders (including, among other, all corporations and certain foreign
individuals) are not subject to these backup withholding and reporting
requirements. See the enclosed "Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9" for additional instructions.
To prevent backup withholding, each tendering holder must
provide such holder's correct TIN by completing the Substitute Form W-9 set
forth herein, certifying that the TIN provided is correct (or that such holder
is awaiting a TIN), and that (i) the holder has not been notified by the
Internal Revenue Service that such holder is subject to backup withholding as a
result of failure to report a interest or dividends or (ii) the Internal Revenue
Service has notified the holder that such holder is no longer subject to backup
withholding. If the Notes are registered in more than one name or are not in the
name of the actual owner, see the enclosed "Guidelines for Certification of
Taxpayer Identification Number on Substitute Form W-9" for information on which
TIN to report.
The Company reserves the right in its sole discretion to take whatever
steps are necessary to comply with the Company's obligation regarding backup
withholding.
9. VALIDITY OF TENDERS. All questions as to the validity,
form, eligibility (including time of receipt), and acceptance of tendered Notes
will be determined by the Company, in its sole discretion, which determination
will be final and binding. The Company reserves the right to reject any and all
Notes not validly tendered or any Notes, the Company's acceptance of which
would, in the opinion of the Company or its counsel, be unlawful. The Company
also reserves the right to waive any conditions of the Exchange Offer or defects
or irregularities in tenders of Notes as to any ineligibility of any holder who
seeks to tender Notes in the Exchange Offer. The interpretation of the terms and
conditions of the Exchange Offer (including this Letter of Transmittal and the
instructions hereto) by the Company shall be final and binding on all parties.
Unless waived, any defects or irregularities in connection with tenders of Notes
must be cured within such time as the Company shall determine. The Company will
use reasonable efforts to give notification of defects or irregularities with
respect to tenders of Notes, but shall not incur any liability for failure to
give such notification.
10. WAIVER OF CONDITIONS. The Company reserves the absolute
right to amend, waive, or modify specified conditions in the Exchange Offer in
the case of any tendered Notes.
11. NO CONDITIONAL TENDER. No alternative, conditional,
irregular, or contingent tender of Notes will be accepted.
12. MUTILATED, LOST, STOLEN, OR DESTROYED NOTES. Any tendering
holder whose Notes have been mutilated, lost, stolen, or destroyed should
contact the Exchange Agent at the address indicated above for further
instruction.
13. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Requests for
information and for additional copies of the Prospectus may be directed to the
Exchange Agent at the address set forth on the first page of this Letter of
Transmittal. Holders may also contact their broker, dealer, commercial bank,
trust company, or other nominee for assistance concerning the Exchange Offer.
14. ACCEPTANCE OF TENDERED NOTES AND ISSUANCE OF EXCHANGE
NOTES; RETURN OF NOTES. Subject to the terms and conditions of the Exchange
Offer, the Company will accept for exchange all validly tendered Notes as soon
as practicable after the Expiration Date and will issue Exchange Notes therefor
as soon as practicable thereafter. For purposes of the Exchange Offer, the
Company shall be deemed to have accepted tendered Notes when, as and if the
Company has given notice thereof to the Exchange Agent. If any tendered Notes
are not exchanged pursuant to the Exchange Offer for any reason, such
unexchanged Notes will be returned,
- 10 -
<PAGE> 11
without expense, to the undersigned at the address shown above or at a different
address as may be indicated under "Special Delivery Instructions."
15. WITHDRAWAL. Tenders may be withdrawn only pursuant to the
limited withdrawal rights set forth in the Prospectus under the caption "The
Exchange Offer--Withdrawal of Tenders."
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
PAYOR'S NAME: ALLEGIANCE TELECOM, INC.
- ----------------------------------------------------------------------------------------------------------------------
<S> <C>
Part 1-PLEASE PROVIDE YOUR TAXPAYER Social Security Number
IDENTIFICATION NUMBER ("TIN") IN THE or TIN
BOX AT RIGHT AND CERTIFY BY SIGNING
AND DATING BELOW _____/_____/_____
----------------------------------------------------------------------------------------
Part 2-Check the box if you are NOT subject to backup withholding under the provisions
of section 3408(a)(1)(C) of the Internal Revenue Code because (1) you have not been
notified that you are subject to backup withholding as a result of failure to report
all interest of dividends or (2) the Internal Revenue Service has notified you that you
are no longer subject to backup withholding. [ ]
----------------------------------------------------------------------------------------
CERTIFICATION--UNDER THE PENALTIES OF PERJURY, I
CERTIFY THAT THE INFORMATION PROVIDED ON THIS FORM
IS TRUE, CORRECT AND COMPLETE. Part 3--
SUBSTITUTE SIGNATURE DATE Awaiting TIN [ ]
-----------------------------------------------------------------------------------------
Form W-9 Name (if joint names, list first and circle the name of the person or entity whose number
DEPARTMENT OF THE TREA you enter in Part I below. See instructions if your name has changed.)
SURY INTERNAL REVENUE -----------------------------------------------------------------------------------------
SERVICE Address
-----------------------------------------------------------------------------------------
PAYER'S REQUEST FOR City, State and ZIP Code
TAXPAYER IDENTIFICATION
NUMBER (TIN) -----------------------------------------------------------------------------------------
List account number(s) here (optional)
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP
WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE EXCHANGE
OFFER. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF
TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL
DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN
PART 3 OF SUBSTITUTE FORM W-9
- --------------------------------------------------------------------------------
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number has
not been issued to me, and either (1) I have mailed or delivered an application
to receive a taxpayer identification number to the appropriate Internal Revenue
Service Center or Social Security Administration Office or (2) I intend to mail
or deliver an application in the near future. I understand that if I do not
provide a taxpayer identification number by the time of payment, 31% of all
payments made to me on account of the Exchange Notes shall be retained until I
provide a taxpayer identification number to the Exchange Agent and that, if I do
not provide my taxpayer identification number within 60 days, such retained
amounts shall be remitted to the Internal Revenue Service as backup withholding
and 31% of all reportable payments made to me thereafter will be withheld and
remitted to the Internal Revenue Service until I provide a taxpayer
identification number.
Signature Date , 1998
------------------------------------- ---------------
- --------------------------------------------------------------------------------
- 11 -
<PAGE> 1
EXHIBIT 99.2
NOTICE OF GUARANTEED DELIVERY
With Respect to
ALLEGIANCE TELECOM, INC.
11 3/4% Senior Discount Notes due 2008
This form must be used by a holder of 11 3/4% Senior Discount Notes due
2008 (the "Notes") of Allegiance Telecom, Inc. (the "Company"), who wishes to
tender Notes to the Exchange Agent pursuant to the guaranteed delivery
procedures described in the section of the Prospectus entitled "The Exchange
Offer--Guaranteed Delivery Procedures," and in Instruction 2 to the related
Letter of Transmittal. Any holder who wishes to tender Notes pursuant to such
guaranteed delivery procedures must ensure that the Exchange Agent receives this
Notice of Guaranteed Delivery prior to the Expiration Date of the Exchange
Offer. Capitalized terms not defined herein have the meanings ascribed to them
in the Letter of Transmittal.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
_____________ __ 1998, UNLESS EXTENDED (THE "EXPIRATION DATE").
TO: THE BANK OF NEW YORK
(THE "EXCHANGE AGENT")
By Registered or Certified Mail
The Bank of New York
101 Barclay Street, 7-E
New York, New York 10286
Attn: Reorganization Section-7-E
By Hand or Overnight Courier:
The Bank of New York
101 Barclay Street, 7-E
Corporate Trust Services Window
Ground Level
New York, New York 10286
Attn: Reorganization Section-7-E
By Facsimile:
(For Eligible Institutions Only)
(212) 815-6339
Confirm by telephone:
(212) 815-2742
DELIVERY OF THIS FORM TO AN ADDRESS, OR TRANSMISSION VIA FACSIMILE,
OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE VALID DELIVERY.
This form is not to be used to guarantee signatures. If a signature on
the Letter of Transmittal is required to be guaranteed by an "Eligible
Institution" under the instructions thereto, such signature guarantee must
appear in the applicable space provided in the signature box on the Letter of
Transmittal.
<PAGE> 2
LADIES AND GENTLEMEN:
The undersigned hereby tenders to the Company, upon the terms and
subject to the conditions set forth in the Prospectus and the related Letter of
Transmittal, receipt of which is hereby acknowledged, the principal amount at
maturity of Notes set forth below pursuant to the guaranteed delivery procedures
set forth in the Prospectus and in Instruction 2 of the Letter of Transmittal.
The undersigned hereby tenders the Notes listed below:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Certificate Number(s) (if known) of Notes or Account Aggregate Principal Amount Aggregate Principal Amount
Number at the Book-Entry Facility At Maturity Represented At Maturity Tendered
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
PLEASE SIGN AND COMPLETE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C>
Signatures of Registered Holder(s) or Date: , 1998
Authorized Signatory: ----------------------
-------------------------------- Address:
-----------------------------------------------------
- -----------------------------------------------------
-----------------------------------------------------
- ----------------------------------------------------- Area Code and Telephone No.:
Name of Registered Holder(s): ------------------------
------------------------
- -----------------------------------------------------
- -----------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
This Notice of Guaranteed Delivery must be signed by the Holder(s) exactly
as their name(s) appear on certificates for Notes or on a security position
listing as the owner of Notes, or by person(s) authorized to become Holder(s) by
endorsements and documents transmitted with this Notice of Guaranteed Delivery.
If signature is by a trustee, executor, administrator, guardian,
attorney-in-fact, officer or other person acting in a fiduciary or
representative capacity, such person must provide the following information:
Please print name(s) and address(es)
Name(s):
------------------------------------------------------------------------
Capacity:
-----------------------------------------------------------------------
Address(es):
--------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- 2 -
<PAGE> 3
GUARANTEE
(Not to be used for signature guarantee)
The undersigned, a firm which is a member of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
or is a commercial bank or trust company having an office or correspondent in
the United States, or is otherwise an "eligible guarantor institution" within
the meaning of Rule 17Ad-15 under the Securities Exchange Act of 1934, as
amended, guarantees that either the Notes tendered hereby in proper form for
transfer (or confirmation of the book-entry transfer of such Notes into the
Exchange Agent's account at Book- Entry Transfer Facility as described in the
Prospectus under the caption "The Exchange Offer--Guaranteed Delivery
Procedures"), together with a properly completed Letter of Transmittal (or
facsimile thereof) (or, in the case of a book-entry transfer, an Agent's
Message) and any other required documents will be received by the Exchange Agent
by 5:00 p.m., New York City time, on the third New York Stock Exchange trading
day following the Expiration Date.
<TABLE>
<S> <C>
Name of Firm:
-------------------------------------------- -----------------------------------------
Authorized Signature
Address: Name:
------------------------------------------------- ------------------------------------
- --------------------------------------------------------- Title:
-----------------------------------
Area Code and Telephone No.: Date: , 1998
----------------------------- -----------------------------
</TABLE>
- --------------------------------------------------------------------------------
DO NOT SEND NOTES WITH THIS FORM. ACTUAL SURRENDER OF NOTES MUST BE MADE
PURSUANT TO, AND BE ACCOMPANIED BY, AN EXECUTED LETTER OF TRANSMITTAL.
- --------------------------------------------------------------------------------
- 3 -
<PAGE> 4
INSTRUCTIONS FOR NOTICE OF GUARANTEED DELIVERY
1. Delivery of this Notice of Guaranteed Delivery. A properly completed and
duly executed copy of this Notice of Guaranteed Delivery and any other documents
required by this Notice of Guaranteed Delivery must be received by the Exchange
Agent at its address set forth herein prior to the Expiration Date. The method
of delivery of this Notice of Guaranteed Delivery and any other required
documents to the Exchange Agent is at the election and sole risk of the holder,
and the delivery will be deemed made only when actually received by the Exchange
Agent. If delivery is by mail, registered mail with return receipt requested,
properly insured, is recommended. As an alternative to delivery by mail, the
holders may wish to consider using an overnight or hand delivery service. In all
cases, sufficient time should be allowed to assure timely delivery. For a
description of the guaranteed delivery procedures, see Instruction 2 of the
Letter of Transmittal.
2. Signatures on this Notice of Guaranteed Delivery. If this Notice of
Guaranteed Delivery is signed by the registered holder(s) of the Notes referred
to herein, the signature must correspond with the name(s) written on the face of
the Notes without alteration, enlargement, or any change whatsoever. If this
Notice of Guaranteed Delivery is signed by a participant of the Book-Entry
Transfer Facility whose name appears on a security position listing as the owner
of Notes, the signature must correspond with the name shown on the security
position listing as the owner of the Notes.
If this Notice of Guaranteed Delivery is signed by a person other than the
registered holder(s) of any Notes listed or a participant of the Book-Entry
Transfer Facility, this Notice of Guaranteed Delivery must be accompanied by
appropriate bond powers, signed as the name of the registered holder(s) appears
on the Notes or signed as the name of the participant shown on the Book-Entry
Transfer Facility's security position listing.
If this Notice of Guaranteed Delivery is signed by a trustee, executor,
administrator, guardian, attorney-in-fact, officer of a corporation, or other
person acting in a fiduciary or representative capacity, such person should so
indicate when signing and submit with the Letter of Transmittal evidence
satisfactory to the Company of such person's authority to so act.
3. Requests for Assistance or Additional Copies. Requests for information
and additional copies of the Prospectus may be directed to the Exchange Agent at
the address set forth on the first page of this Notice of Guaranteed Delivery.
Holders may also contact their broker, dealer, commercial bank, trust company,
or other nominee for assistance concerning the Exchange Offer.
- 4 -
<PAGE> 1
EXHIBIT 99.3
INSTRUCTIONS TO REGISTERED HOLDER AND/OR
BOOK-ENTRY TRANSFER FACILITY PARTICIPANT FROM BENEFICIAL OWNER
OF
ALLEGIANCE TELECOM, INC.
11 3/4% SENIOR DISCOUNT NOTES DUE 2008
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
_______________ 1998, UNLESS EXTENDED (THE "EXPIRATION DATE").
To Registered Holder and/or Participant of the Book-Entry Transfer Facility:
The undersigned hereby acknowledges receipt of the Prospectus, dated
__________,1998 (the "Prospectus"), of Allegiance Telecom, Inc. (the "Company"),
and the accompanying Letter of Transmittal (the "Letter of Transmittal"), that
together constitute the Company's offer (the "Exchange Offer") to exchange
$1,000 principal amount at maturity of its Series B 11 3/4% Senior Discount
Notes due 2008 (the "Exchange Notes"), for each $1,000 principal amount at
maturity of its outstanding 117/8% Senior Discount Notes due 2008 (the "Notes").
Capitalized terms used but not defined herein have the meanings ascribed to them
in the Prospectus.
This will instruct you, the registered holder and/or book-entry
transfer facility participant, as to the action to be taken by you relating to
the Exchange Offer with respect to the Notes held by you for the account of the
undersigned.
The aggregate face amount at maturity of the Notes held by you for the
account of the undersigned is (FILL IN AMOUNT):
$____________ of the 11 3/4% Senior Discount Notes due 2008.
With respect to the Exchange Offer, the undersigned hereby instructs
you (CHECK APPROPRIATE BOX):
[ ] TO TENDER the following Notes held by you for the account of
the undersigned (INSERT PRINCIPAL AMOUNT AT MATURITY OF NOTES
TO BE TENDERED):
$
---------------------
[ ] NOT TO TENDER any Notes held by you for the account of the
undersigned.
If the undersigned instructs you to tender the Notes held by you for
the account of the undersigned, it is understood that you are authorized (a) to
make, on behalf of the undersigned (and the undersigned, by its signature below,
hereby makes to you), the representations and warranties contained in the Letter
of Transmittal that are to be made with respect to the undersigned as a
beneficial owner, including but not limited to the representations that (i) the
undersigned's principal residence is in the state of (fill in state)
_____________________, (ii) the undersigned is acquiring the Exchange Notes in
the ordinary course of business of the undersigned, (iii) the undersigned is not
participating, does not intend to participate, and has no arrangement or
understanding with any person to participate in the distribution of the Exchange
Notes, (iv) the undersigned acknowledges that any person participating in the
Exchange Offer for the purpose of distributing the Exchange Notes must comply
with the registration and prospectus delivery requirements of the Securities Act
of 1933, as amended (the "Act"), in connection with a secondary resale
transaction of the Exchange Notes acquired by such person and cannot rely on the
position of the staff of the Securities and Exchange Commission set forth in
no-action letters that are discussed in the section of the Prospectus entitled
"The Exchange Offer--Resale of the New Notes," and (v) the undersigned is not an
"affiliate," as defined in Rule 405 under the Act, of the Company; (b) to agree,
on behalf of the undersigned, as set forth in the Letter of Transmittal; and (c)
to take such other action as necessary under the Prospectus or the Letter of
Transmittal to effect the valid tender of such Notes.
(CONTINUED ON BACK)
<PAGE> 2
PLEASE NOTE: THE COMPANY HAS AGREED THAT, FOR A PERIOD OF 180 DAYS AFTER THE
EXPIRATION DATE, IT WILL MAKE COPIES OF THE PROSPECTUS AVAILABLE TO ANY
PARTICIPATING BROKER-DEALER FOR USE IN CONNECTION WITH RESALES OF THE EXCHANGE
NOTES.
[ ] Check this box if the Beneficial Owner of the Notes is a Participating
Broker-Dealer and such Participating Broker-Dealer acquired the Notes
for its own account as a result of market-making activities or other
trading activities. IF THIS BOX IS CHECKED, PLEASE SEND A COPY OF THESE
INSTRUCTIONS TO DENNIS M. MAUNDER, CONTROLLER, VIA FACSIMILE: (214)
853-7107.
SIGN HERE
Name of beneficial owner(s):
----------------------------------------------------
Signature(s):
-------------------------------------------------------------------
Name (please print):
------------------------------------------------------------
Address:
---------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
Telephone number:
---------------------------------------------------------------
Taxpayer Identification or Social Security Number:
------------------------------
Date:
---------------------------------------------------------------------------
